Right of First Refusal Under New Jersey Business Law
A right of first refusal is a contractual provision which gives a person or entity a preferential right to enter into a transaction before a third party may. Thus, generally, if an owner receives an offer, say to purchase something or enter into a transaction on certain terms, the holder of the right of first refusal can enter into that transaction before and to the exclusion of the third-party.
New Jersey business law will enforce the validity of agreements granting a right of first refusal, so long as they are properly constructed and detailed, setting forth the specifics of how and when the right of first refusal can be exercised. These terms are customarily built into a contract between the involved parties.
How It Works
The most frequent place where a right of first refusal is seen is in a sale of something. For instance, let’s say that Party A sells Party B a plot of land. Party A, the seller, wants to sell only for $1,000,000. However, the buyer only wants to pay $950,000. A might agree that if Party B paid the $950,000 and gave Party A the right of first refusal to repurchase the land if another offer was received within five years. Then three years later Party C offers to buy the property from Party B for $1,100,000. Party B is required to notify Party A before it accepts the offer. Party A has been watching the property since he sold it and believes it is now worth $1,500,000, so he can exercise his right of first refusal and purchase the property for $1,100,000 from Party B believing he can turn around and sell it for $1,500,000 and make a quick $400,000 profit without having to pay the property taxes and other carrying costs during the three years that Party B owned it. Alternatively, if Party A thinks the value of the property isn’t worth the $1,100,000 that Party C is willing to pay, he can decline to exercise the right of first refusal and Party C is welcome to go ahead and purchase the property from Party B.
Typical Terms
Contractual provisions granting a right of first refusal generally have certain elements:
- First, the right of first refusal must be exercised on the same terms as the third party offer. This certainly includes the purchase price, but includes other terms as well, such as seller financing, clouded title, environmental issues, and a host of other matters.
- Second, the other party to the contractual provision must give the holder of the right of first refusal notice of subsequent offers, generally within a certain number of days.
- Third, the holder of the right of first refusal generally must exercise its right by notifying the other party that it will do so within a specified time period.
- Finally, rights of first refusal are generally for limited duration, normally a number of years.
Examples of Rights of First Refusal
- Shareholder Agreements. Rights of first refusal are common in shareholder, partnership and LLC operating agreements. For example, such an agreement might allow a minority owner the first opportunity to purchase any shares or interests that another owner is looking to sell. The purpose of this provision is to protect the continuing owners by ensuring that shares remain within the existing ownership community, so long as the remaining owner exercising the right of first refusal is willing and able to match the price and terms proposed by an outside buyer.
- Real Estate Transactions. As discussed above, rights of first refusal can often be found in contracts for the sale of property. They can also be used between partnerships or co-owners with joint rights to a property. If one partner wants to sell their portion of the real estate, the right of first refusal provides other co-owners the opportunity to buy their share, normally at an appraised value, before it’s offered to an external party.
- Landlord/Tenant Transactions. A lessee might be given a right of first refusal by the lessor. If the lessor decides to sell the property, the lessee has the first option to purchase it on the same terms offered by a potential third-party buyer. This agreement can often be found in commercial and sometimes even residential leases.
- Condominium Associations. Condominium associations often include a right of first refusal as part of their bylaws. In this situation, when a condo owner decides to sell, the association has the right to purchase the condo at the same terms offered by a prospective buyer. If they waive this right, the condo owner is free to proceed with the sale to the interested party.
- Employer/Employee Relationships. The Right of First refusal is also used and enforced in New Jersey employment law. For example, a right of first refusal can be used for the right of an employee to accept any assignment or job promotion before it is offered to other employees or external applicants. In cases of company share offerings, employees holding the right of first refusal can purchase company shares before they are offered to outside investors. Rights of first refusal clauses are sometimes found in executive contracts where they have the first chance to purchase company assets, such as a retiring executive’s equity interest in the company.
Litigation Over Rights of First Refusal
If a seller refuses to give the holder of a right of first refusal notice or the option to exercise its right, or if a party which has executed the right of first refusal then backs out, New Jersey courts will uphold the right of the non-breaching party to enforce the right of first refusal and award it damages against the breaching party.
Contact Us
If a shareholder’s right of first refusal is being violated, our New Jersey business attorneys to aid in the enforcement of these rights under New Jersey business law. Likewise, our firm frequently provides counsel to business clients who need help in drafting, negotiating and navigating these complex contractual provisions. Call us today at (973) 890-0004 or fill out the contact form on this page for assistance.