Also known as:right of first refusal · right of first refusals · ROFR · right of first offer
Written by attorneys · grounded in primary & secondary sources — see below
A preemptive right that entitles its holder to purchase property on the same terms as any bona fide third-party offer before the owner may sell to that third party. The right arises in both donative transfers and commercial transactions. Its validity turns on whether the price term and exercise period are reasonable under the circumstances.
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Cases
Restatements
Casebooks
Hornbooks
Course Outlines
Study Supplements
How it applies
Common Examples
6
Will Devise With Below-Market Price
Roberto Reyes's will devised a downtown office building to his son Rowan Russell but granted Redwood Bank a right of first refusal exercisable at a price fixed by capitalizing the building's historic lease rate. Years later a developer offered triple that amount. Redwood Bank had 120 days to decide whether to buy at the outdated formula price. The court held the clause invalid because the depressed price and extended decision window unreasonably impaired Rowan Russell's ability to sell at market value.
Lease ROFR After Joint Tenant Death
Rajesh Rao and Raphael Rivera held Blackacre as joint tenants. Rajesh Rao leased the parcel to Reliance Insurance with a right of first refusal if the property were ever offered for sale. After Rajesh Rao died, Reliance Insurance sought to enforce the right against the surviving joint tenant. The court determined that the right of first refusal survived the death and remained enforceable against the surviving owner.
Tenhet v. Boswell(1976) 18 Cal. 3d 150, 155, 133 Cal. Rptr. 10, 554 P.2d 330
Commercial Option Converted To ROFR
Rhapsody Entertainment conveyed a theater to Symphony Space subject to a right of first refusal that could be exercised decades later at a fixed price. When Symphony Space later received a market offer, it notified the holder. The court invalidated the right because the fixed-price term and unlimited duration created an unreasonable restraint on alienation.
The Symphony Space, Inc. v. Pergola Properties, Inc.669 N.E.2d 799 (1996)
Corporate Opportunity And ROFR
A director of Cellular Information Systems learned of an available license that the company could not afford. The director purchased it personally after the board declined interest. When the company later asserted a right of first refusal under its governing documents, the court held that the director had no duty to present the opportunity once the company had already rejected it.
Broz v. Cellular Information Systems, Inc.673 A.2d 148, 154–55 (Del. 1996)
Securities Sale With ROFR Notice
Affiliated Ute Citizens sold shares in a tribal corporation to outside buyers without first offering the shares to existing members who held rights of first refusal. The members sued for nondisclosure. The court held that the failure to honor the rights of first refusal constituted a material omission that violated federal securities law.
Affiliated Ute Citizens of Utah v. United States406 U.S. 128, 153-154 (1972)
Eminent Domain And Preemptive Rights
Hawaii Housing Authority condemned leased land to sell fee simple interests to sitting tenants. Landowners who held rights of first refusal under prior leases objected that the condemnation bypassed their preemptive rights. The Court upheld the taking, ruling that the state's public purpose overrode the contractual rights of first refusal.
Hawai`i Housing Authority v. Midkiff467 U.S. 229, 233-234 (1984)
Common questions
Frequently Asked
4
When is a right of first refusal in a will an invalid restraint on alienation?+
A right of first refusal in a donative transfer is invalid when its price term is fixed below market value or its exercise period is unreasonably long. Courts examine whether the designated holder must pay a commercially sensible price and whether the response window allows ordinary market sales to proceed. If either element fails, the provision operates as a disabling or forfeiture restraint.
Does a right of first refusal always violate the rule against perpetuities?+
No. Rights of first refusal are treated differently from options to purchase because they do not force a sale. Many jurisdictions hold that a right of first refusal measured by fair market value or a third-party offer does not violate the rule because it preserves alienability. Fixed-price rights of first refusal, however, may be subject to the rule in some states.
What makes the price term of a right of first refusal reasonable?+
A price term is reasonable when it requires the holder to match a bona fide third-party offer or to pay fair market value at the time of exercise. Fixed formulas that become outdated after rezoning or appreciation are unreasonable because they force the owner to sell far below current value. Courts also consider whether the formula was reasonable when the right was created.
How long may the holder have to exercise a right of first refusal?+
A commercially reasonable period, often thirty to ninety days, is acceptable. Periods of one year or more are likely unreasonable because they deter third-party buyers who cannot wait indefinitely. The Restatement illustrations confirm that a thirty-day exercise window paired with a market-price term supports validity while a one-year window supports invalidity.
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