right of first refusal

A right of first refusal differs from an option agreement, in that it grants a right to match any other offerer for the property to which the subject property might be sold.

background to Rights of First Refusal

In respect to deciding whether a contract does grant of the right of first refusal, Kitto and Fullager JJ in Woodroffe v Box [1954] in the High Court of Australia, which was adopted by English Courts, commented that the meaning of the right granted in the contractual term will depend on its context:

"The truth is, indeed, that, in dealing with such a loose and colloquial expression, it may often be a mistake to cling strongly to a preconceived meaning. The safer and sounder course is to regard it as an expression of fairly flexible import, to look at the whole of what the parties to an instrument have said, and in the light of that whole to determine whether they have or have not conveyed an intention that an immediate offer is being made or is to be made."

Nature of Rights of First Refusal

Rights of first refusal do not create a positive obligation on the part of the grantor of the property to sell, lease or otherwise deal with the property. Depending on the wording of the right of first refusal, it gives rise to a negative obligation not to sell without taking certain steps first. A right of "first refusal" grants a right to obtain the subject matter of the right, whether it is intellectual property, land, a service or a business opportunity to enter a contract. It confers a right to be given an opportunity to match any third party offer which the grantor of the right might be otherwise minded to accept, and, in the event that the grantee matches the offer, to be awarded the business to which the offer relates.

Accordingly, a right of first refusal depends upon the property being made available in the first place by the person granting the right. There is no obligation on the part of the owner to do so to (depending on the detailed terms of the contract granting the right).

The nature of a right of first refusal is such that it necessitates the making of a contractual offer to the party who is the grantee of the right of first refusal.