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There are various ways in which your business may secure commercial contracts in English law. A contract may arise from informal chats in person with other interested parties. At another time, a formal procedure, such as a bidding process or the continuation of a previous binding contract. Negotiating new contracts with a right of the last refusal is one way in contract law to secure commercial contracts for your company with other parties. The right of last refusal is in the best interest of your business when considering your purchase price against offers from interested parties. This article will consider the main benefits of negotiating commercial contracts with a right of last refusal.
Business Right of Last Refusal
A right of the last refusal is a legal obligation to enable your company to match purchase price offers from interested parties. It can do this when attempting to purchase goods or property and forming a binding contract. So, if another party provides an excellent bid to the seller you are interested in purchasing from, your organisation will have a final opportunity to match it or beat it. Therefore, your business can benefit from the right of last refusal when forming new contracts.
The effect of the right of the last refusal means that your company controls the bidding process because you will know, rather than simply guess, the best offer and be able to match or exceed it. In contrast, other bidders will make their bids without knowing how much others, like you, are bidding.
Business Benefits from Right of Last Refusal
Below are three key benefits of the right of the last refusal.
1. You Know the Best Bid
The right of the last refusal gives you vital information on the best bid meaning your business benefits from the right of last refusal. This information is critical in ensuring your company’s offer is the same or better than your competition. On many occasions, the highest price within a bidding process will be significantly higher than the second-highest bid. However, in cases where your company has a right of the last refusal, your business has a better chance of beating the second-best offer by only a small amount. Your organisation is more likely to tender a winning bid at a lower price with a right of last refusal.
2. More Advantageous Than a Right of First Refusal
Some business owners attach significant value to a right of first refusal. However, whilst having a right of first refusal is better than nothing, it is not as valuable as the right of the last refusal.
This is because a right of first refusal provides your company with no information on whether your prospective bid will be higher or lower than your competition. However, in contrast, a right of the last refusal gives you the best current offer for you to match or beat.
3. Recorded Within a Written Document
Nearly all rights of the last refusal are stated within a written commercial document, whether this is, for example, a lease negotiated with a landlord or a shareholders agreement. Having the right recorded in writing is an excellent idea as it provides you and any future seller with certainty about the nature of the right of the last refusal.
Typical wording is likely to mention some of the following conditions:
(a) how the seller should notify your company of a bid, typically through an offer notice;
(b) the time limit in which your business should be informed of any open market sale;
(c) how long your company has to respond with a bid, usually 7 or 28 days; and
(d) any expiry date of the right of the last refusal as some may lapse by, for example, 12 months.
It is good practice to try and make the wording covering any right of the last refusal as detailed as possible to ensure clarity and certainty for your business.
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Key Takeaways
Your business can benefit from the right of last refusal. It can be a significant provision to add to your commercial contracts. It lets your company know the best bid for goods or property you wish to purchase so you can narrowly beat this price and potentially win the purchase. Where the right of the last refusal is an option, someone may typically include it in a written document, and it is essential that the wording is carefully chosen.
If you are considering using or negotiating a right of last refusal, our experienced commercial 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.
Frequently Asked Questions
A judge will rarely do so. While ensuring an open market is important, this right only gives you an increased chance of winning the bidding rather than guaranteeing success. However, whilst not a guarantee, upon taking reasonable steps, your organisation is much more likely to be successful and receive an acceptance notice from the seller.
Not always, no (absent situations in which family members grant them to each other). They can sometimes be hard to achieve because your organisation gains a significant advantage in future bidding processes. Consequently, your company may wish to consider instructing a lawyer to go through a due diligence process and negotiate these types of clauses.
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