Courtesy: Letter of refusal
ROFR: Abe owns a house and Bo offers to buy that house for $1 million. However, Carl holds a right of first refusal to purchase the house. Therefore, before Abe can sell the house to Bo, he must first offer it to Carl for the $1 million that Bo is willing to buy it for. If Carl accepts, he buys the house instead of Bo. If Carl declines, Bo may now buy the house at the proposed $1 million price.
ROFO: Carl holds a ROFO instead of an ROFR. Before Abe can negotiate a deal with Bo, he must first try to sell the house to Carl on whatever terms Abe is willing to sell. If they reach an agreement, Abe sells the house to Carl. However, if they fail, Abe is free to start fresh negotiations with Bo without any restriction as to price or terms.
The following are all variations on the basic ROFR:
- Duration: The ROFR is limited in time. For example, Abe must make the offer to Carl for any proposed sale only in the first five years. After that, the right expires and Abe has no further obligation to Carl.
- Exceptions include certain transactions. Abe may sell or transfer the property to a holding company, a trust, family members, etc. without first offering it to Carl. However, the new owners remain subject to the right.
- Transferability: Carl may assign his ROFR to Dave. Abe must now offer Dave an option to purchase the property instead of Carl. Not every ROFR is transferable; some are personal to the original holder.
- Extinguished on first sale: if Abe sells the property to Bo because Carl declines the right, the property is no longer subject to the right. Bo may resell it free of the ROFR.
- Extinguished on declined/failed exercise: if Abe proposes to sell the property to Bo and Carl declines, or if Carl accepts but is unable to complete the transaction, the right is extinguished whether or not Abe ultimately sells the property.
- Persistent: in contrast to the above two, in this case, the right runs with the property and binds the new purchaser. If Abe sells the property to Bo, Bo must offer the property to Carl first, just like Abe if Bo wishes to re-sell it.
- Offer and acceptance terms: specific deadlines, procedures, and forms may be required. For example, Abe must give Carl a “notice of sale.” Carl has 30 days to accept or reject, with failure to respond counting as rejection. Carl must then close the transaction within that time, or that counts as a failed attempt to exercise.
- Limited time period to close transaction: Abe offers the property to Carl under the ROFR, and Carl declines. Abe now has 60 days to close the transaction with Bo. If it cannot close within 60 days, Abe must offer it again to Carl before proceeding further with Bo.
- Substitute purchaser allowed: Abe offers the property to Carl, who declines. Abe is then free to sell it to Bo but fails to do so. Abe may sell the property under the same terms to Erin instead without reoffering it to Carl.
- No pending transaction required: Abe wishes to sell the house for $1 million but has not yet identified a purchaser. He prepares proposed sales terms and offers it to Carl on those terms. If Carl declines, Abe may then shop around for a purchaser.