Rights of First Offer and of First Refusal

This article is a case study of a particular transaction in which the buyer agreed in a purchase agreement to grant the seller both a right of first offer (ROFO) and a right of first refusal (ROFR) to repurchase the property. Compliance with the terms of the ROFO and ROFR proved a bitter and extracted process for the buyer. 

The terms of the ROFO provided that before the buyer could offer the property for sale, it had to submit a ROFO offer to the seller. The seller had 30 days to notify the buyer if it accepted that offer. If the seller did not accept it, the buyer could seek offers from third parties — and if the buyer received an acceptable ROFO offer, it must first submit the ROFR offer, executed by the ROFR prospective purchaser. Both the ROFO offer and ROFR offer had to set forth “the purchase price, terms of payment and other material terms.” 

The buyer intended to list the property, so the broker was informed, and a standard form listing agreement executed. The listing agreement, however, failed to provide for all of the contingencies and expired before the ROFO and ROFR process would be completed. It was only through the good faith and integrity of the broker and the buyer that the broker remained meaningfully involved and received a commission. 

The buyer first made a ROFO offer to the seller on terms that were less favorable than those the broker was instructed to offer to prospective purchasers. The differences were entirely justifiable assuming that the seller would not need the same due diligence and other contingencies a third-party would; nonetheless, the seller insisted the ROFO offer was invalid. The seller also contended that if it did not accept the ROFO offer and the buyer wanted to market the property on different terms, the seller was entitled to a modified ROFO offer submitted for consideration for another 30 days, extending the timeframe of the transaction.

A prospective purchaser was found, but did not fully understand how the process worked and submitted a Letter of Intent (LOI) with only the basic terms set forth. This seemingly straightforward event raised complications.

The buyer convinced the prospective purchaser that the seller could insist that the LOI did not set forth all terms that the seller might consider “material” and would have to be resubmitted with the additional “material” terms. Moreover, the LOI provided that it was “non-binding and subject to further negotiations and documentation” — as an LOI typically does — and the seller would have a legitimate basis for claiming the LOI did not truly constitute an “offer.” 

To avoid any contention by the seller that a material term has been omitted, the ROFR offer would have to be submitted as a fully negotiated purchase agreement executed by the prospective purchaser. Most prospective purchasers, however, will submit only an LOI, refusing to spend the time and incur the attorney fees in negotiating the purchase agreement, as the time and fees would be wasted if the seller accepts the ROFR offer. 

In this case, the prospective purchaser agreed to take the time and risk the fees, but the negotiations were needlessly lengthy because the prospective purchaser struggled to understand why the seller could reject a purchase agreement signed by both the buyer and the prospective purchaser and binding on both, subject by its terms, to a ROFR contingency. Ultimately, an acceptable purchase agreement was signed by the prospective purchaser and submitted to seller as a valid ROFR offer.

The purchase agreement, not surprisingly under the circumstances, provided for a lengthy due diligence and a financing contingency of 90 days. The seller accepted the ROFR offer, and, as a result, enjoyed the right to terminate during the same contingency period.

The seller closed, but if it had terminated the ROFR purchase agreement during the contingency period, and the ROFR purchaser, as well, terminated the purchase agreement during its 90 day contingency period, as many as eight or nine months would have passed from the date the buyer first submitted the ROFO offer to the seller. To put the property back on the market, the buyer would have had to submit another ROFO offer to the seller, with the process beginning anew and the possibility of another delay of equal length with no certainty that the property will be sold in the end.

In this case, if the terms of the ROFO and ROFR had been more carefully considered and drafted, the buyer could have avoided what seemed an endless nightmare.  

Bruce B. May, an attorney with Jennings Strouss, has devoted his entire career to all aspects of the law and practice of real estate and commercial transactions throughout Arizona. He has been listed in The Best Lawyers in America^© and Southwest Super Lawyers in the category of real estate since the inception of both.

In 1991, May was elected to membership in The American College of Real Estate Lawyers (ACREL) in honor of his state-wide and national accomplishments. He is also a member of the Georgetown Advanced Commercial Leasing Institute {GACLI) in recognition of his expertise in commercial leasing and, while it was active, kept current with his corporate clients as a member of the International Association of Attorneys and Executives in Corporate Real Estate.