Right of First Refusal
Also known as: ROFR
TL;DR — A right of first refusal gives remaining co-owners the first opportunity to purchase a departing co-owner's share before it can be sold to an outside party.
What It Means
A right of first refusal (ROFR) is a contractual provision in a Co-ownership Agreement that gives remaining co-owners the first opportunity to purchase a departing co-owner's share before it can be offered to an outside party. It is one of the most important protective mechanisms in co-ownership governance.
When a co-owner decides to exit, the ROFR requires them to notify the remaining co-owners and offer their share on specified terms — typically at fair market value as determined by an agreed-upon valuation method — before seeking an external buyer.
How It Works
A typical ROFR provision defines several key parameters: the triggering events that activate the right, the method for determining the share's value, the notice period required, the timeframe within which remaining co-owners must respond, and the financing terms for the Buyout. These parameters vary by agreement but are essential to making the provision enforceable and practical.
If no remaining co-owner exercises the right within the specified period, the departing co-owner is generally free to sell to a third party — subject to any additional conditions in the Co-ownership Agreement.
Why It Matters for Co-owners
Co-ownership is both a financial partnership and a living arrangement. A ROFR protects remaining co-owners from being forced into a partnership with an unknown third party. Without this provision, a co-owner could sell their share to anyone, fundamentally changing the dynamics of the arrangement without the consent of other co-owners.
A ROFR also creates a more orderly exit process. Combined with a Buyout provision and a defined Exit Strategy, it gives all parties clarity on what happens when someone wants to leave.
Key Points
- Gives remaining co-owners the first opportunity to buy a departing co-owner's share
- Prevents unwanted third parties from entering the co-ownership arrangement
- Typically requires fair market value pricing through an agreed valuation method
- Includes defined notice periods and response timeframes
- Works alongside buyout provisions and exit strategies to create orderly transitions