What is the First Right of Refusal in England?  

If your business enters commercial agreements, including a first right of refusal in your contract can greatly benefit your company. While some business deals are simple negotiations, others involve fierce bidding wars. Having the first right of refusal on an item or property allows your company to secure goods before other parties. This article will consider the benefits of having the first right of refusal and when your company should insist on having one.

What is the First Right of Refusal?

Effectively, this gives your company the advantage of knowing the amount bid by another party and making a higher offer. Generally, some of the uncertainty within a bidding process stems from not knowing the offers. Thus, having this knowledge gives your business a competitive edge.

How is This Different to a Right of First Offer?

A right of the first offer permits your business to make the opening offer. However, you do not know whether others will beat that offer, so it risks your business bidding at an overvalue or undervalue. In contrast, the first right of refusal informs you of the actual offer, so you can match it or simply offer a little more. Again, this information is vital in ensuring your company’s (higher) bid is likely to be more attractive than the competition.

Example

Let us say that your business hires a state-of-the-art piece of machinery. It is a rare piece of equipment that enables your company to make market-leading products. The company you hire it from is the only producer of the equipment, and the machinery you rent is the only one they hire out.

It would be wise to agree to the first right of refusal within the hire agreement. Thus, if a competitor offers £70,000 for the equipment, you know that you can easily outbid them and provide a little more. In contrast, if the hirer grants you a right of first offer, they would merely inform you of their plans to sell the equipment. If you were desperate to retain the equipment, you might put forward an offer well over your competitor.

Recording First Rights of Refusal

Your business should always record this right within a written agreement. For example, if the first right of refusal relates to company shares, it could be recorded within a shareholders agreement.

The first right of refusal clause must set the time limit within which your business should make an offer. In addition, first right of refusal terms should require the property owner to provide your company with written notice of the proposal put forward by the other party. Therefore, your business knows the exact playing field and can table a competitive offer.

Key Takeaways

Negotiating a first right of refusal can be of great value to your business. They provide certainty by ensuring you have a decent chance to fend off other bidders by knowing their bids. However, they can sometimes be difficult to negotiate. Most potential sellers may favour a right of first offer instead, as this tends to lead to higher bids. While the right may take some time to prove useful to your company, the benefit could be invaluable.

If you are considering the use or negotiation of a first right of refusal, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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