Rights of First Refusal are contractual privileges that give a party the option to buy or match the terms of a proposed transaction before the seller can proceed with an outside party.
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Last Updated: February 20, 2026
A contract containing a right of first refusal gives the holder the right to purchase an asset or enter into a business contract before anyone else.
A right of first refusal is a contract term that allows a specified individual or company the option to enter into a business transaction before anyone else has the opportunity to do so. This term frequently appears in real estate and business contracts.
There are many uses for a right of first refusal. For example, a building owner might give a tenant a right of first refusal to purchase the property in the event of a sale. They may use such a term to entice appealing tenants who will benefit because they gain the option to buy instead of being evicted if the owner eventually decides to sell the property.
Partners in a joint venture, limited liability company (LLC), or other legal entity might include a right of first refusal in their formation documents, giving one member or partner the right to purchase the ownership interest first. This prevents outsiders from joining the company if one partner decides to sell their share.
Finally, a trustor may include a term in their trust giving a child a right of first refusal, meaning that child gets the first opportunity to purchase the family home.
The main advantages of a right of first refusal are that it gives the holder an opportunity to obtain a deal without competition and it can save the seller transaction costs. This contract term also may give a potential investor time to see how well a new business does before deciding to invest.
On the other hand, if a buyer holds a fixed price right of first refusal on a home and the value of the home decreases, then it may not be a benefit.
Lenders also won’t always give a homeowner a mortgage or refinance their existing mortgage if their home is bound by a right of first refusal. This is because the home serves as collateral for the mortgage. The lender will want to obtain the best market price if it has to repossess and sell the home, and not be limited to one seller.
Of course, the contract term must be valid to be enforceable. It’s important for both parties to have legal counsel when negotiating a right of first refusal. It’s important to specify, among other things:
Both sides also need to consider the options in case of a breach. When the owner of an asset fails to offer the holder the promised right of first refusal, the remedies are specific performance or monetary damages. Specific performance requires the owner to offer the deal, such as by giving the holder the right to buy a house. But if state law or other circumstances make specific performance impossible, then a court will award monetary damages.
The holder of a right of first offer is entitled to receive advance notice of a deal and have time to make the first offer. Unlike with a right of first refusal, the offeror doesn’t have to accept the offer. They’re free to reject the offer or to negotiate in light of subsequent offers from other potential buyers.
A right of first refusal can be a useful tool for buyers and sellers in doing business and dealing in real estate. But it can be helpful to have a lawyer negotiate the terms.
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ZenBusiness exists to accomplish one simple mission: helping entrepreneurs build and grow the businesses they’re passionate about. For example, ZenBusiness can help anyone start an LLC all around the U.S. They’ve also got a customizable operating agreement template that can include a first right of refusal clause.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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