ROFR, ROFO and Options: What's the Difference?
By: Katheryn Thorson
Clients frequently enter into transactions that contemplate possible future transactions between the same parties. For example, a buyer purchasing real estate from a property owner may only want to do so if the buyer will have the opportunity to buy the surrounding real estate in the future. Rights of first refusals (“ROFR”), rights of first offer (“ROFO”) and options are all contractual rights that are often included in agreements to set forth the terms in which the parties will handle these possible future transactions.
ROFR (Rights of First Refusal): A ROFR prohibits the grantor of the ROFR from accepting a third-party offer without first offering the terms of the third-party offer to the holder of the ROFR. In real estate, a ROFR is typically triggered when a property owner receives a third party offer to buy or lease the property. The property owner must then allow the holder of the ROFR to either buy or lease the property under the same terms of the third party offer or the terms set forth in the ROFR agreement. If the holder of the ROFR does not exercise its right to buy or lease the property, the property owner can then proceed with selling or leasing the property to the third party.
ROFO (Rights of First Offer): A ROFO requires the grantor of the ROFO to negotiate with the holder of the ROFO before negotiating with other third parties. In real estate, a ROFO is typically triggered when a property owner decides to sell or lease the property. Before offering to sell or lease the property to third parties, the land owner must first offer to sell or lease the property to the holder of the ROFO. If the holder of the ROFO does not exercise its right to buy or lease the property, the land owner is free to offer the property for sale or lease to other third parties.
Options: An option is the right granted to the option holder that allows, but does not require, the option holder to complete a transaction pursuant to certain terms. In real estate, an option holder typically has a certain amount of time to exercise its right to purchase or lease the property at a specified price. The option holder generally is required to pay an option fee for this right.
As you can see, it is important to understand the differences between a ROFR, ROFO and option and how they can accomplish your goals. For assistance in drafting or reviewing a ROFR, ROFO or option agreement or if you wish to discuss a real estate transaction, please contact Katheryn Thorson or any other BrownWinick attorney.