When navigating real estate transactions, it’s crucial to understand the distinctions between two common tools used by buyers and sellers: Rights of First Offer (ROFOs) and Rights of First Refusal (ROFRs).
Both provide potential purchasers with the right to acquire an asset before it’s sold to others, but they function in fundamentally different ways, and these differences can have significant implications for the value and marketability of the asset involved.
What is a ROFO?
A Right of First Offer (ROFO) grants a potential purchaser the right to make the first offer on an asset when the seller decides to sell.
The seller initiates the process by notifying the potential purchaser of their intent to sell, and the purchaser has a limited time to either accept the offer terms proposed by the seller or negotiate further.
If an agreement cannot be reached, the seller is free to negotiate with third parties, but they are restricted from offering the asset on terms significantly lower than what was initially offered to the first purchaser. Typically, sellers can offer the asset to other buyers at terms that are 90-95% of the original offer price.
What is a ROFR?
A Right of First Refusal (ROFR), on the other hand, allows a potential purchaser to match an offer that the seller has received from a third party.
The process begins when the seller receives an offer from a third-party buyer. The seller then provides the terms of that offer to the purchaser with the ROFR, who has a set time to decide whether to match the offer and purchase the asset on the same terms.
Unlike a ROFO, which gives the potential buyer the opportunity to initiate negotiations, a ROFR places the purchaser in a more reactive position, potentially putting them at a disadvantage if the third-party offer is better.
ROFO vs. ROFR: Key Differences
While both rights grant priority to the holder, the ROFR is often considered more restrictive for sellers, as it ties them to an existing third-party offer.
In contrast, the ROFO offers more flexibility, as the seller is not locked into a specific offer but is required to reoffer the asset if the initial offer is not accepted. This can help maintain marketability, especially in fluctuating or declining markets.
Sellers and grantors need to be aware of how these rights affect future transactions. For instance, a ROFR can complicate the sale process by discouraging third-party buyers who may be unwilling to negotiate with the risk that someone else might match their offer.
On the other hand, a ROFO allows sellers to continue marketing their asset while still providing an opportunity for the holder of the right to purchase first.
Considerations When Drafting ROFOs and ROFRs
When drafting these rights, sellers and buyers should be mindful of the practical implications, including the timeline for responses and the level of detail required to trigger the right.
For ROFRs, it’s essential to ensure that the terms triggering the option are clear and concise, often in the form of a term sheet, to avoid unnecessary complications.
In conclusion, while ROFOs and ROFRs serve similar purposes, understanding the nuanced differences between them can significantly impact the success of a transaction.
For sellers, choosing between the two requires careful consideration of how each option may affect the marketability and value of the asset.
