If you are in business, you will likely encounter a number of contracts in your dealings. In commercial relationships, these contracts possess a number of clauses or provisions that can serve in your favour, and provide you with protection and benefits in the event that a shift in the relationship occurs. These can function like prospective functions that are contingent on certain things happening. Even though specific agreements may vary from case to case, they are always likely to involve a few integral components. One of these common elements is a right of first refusal clause.
Essentially, a right of first refusal clause grants an option to an entity to accept a business offer before anyone else. Whilst that offer may not currently yet exist, in the event that it arises, the right of first refusal clause in an agreement is brought to the fore. If the entity holding the right of first refusal chooses not to exercise that right, the other party will usually be entitled to offer the right to another business or deal to external third parties. Sometimes this right can exist from the outset. However, other times it may be dependent upon whether goods and services become available.
Shareholders agreement
Shareholders Agreements are a common place to find right of first refusal clauses. A Shareholders Agreement is a contract that attempts to regulate the rights and obligations of shareholders or members (used interchangeably) in the context of their ownership of securities in a company. Whilst many of these agreements can be similar, each will vary depending on the nature and structure of the company. A right of first refusal in this context is where shareholders leaving a company may be obligated to first offer their shares to the existing shareholders of the company. If the remaining shareholders decline the offer, the leaving shareholders may be then entitled to put the shares on the open market.
It is important that when formulating this document, you have an understanding of the terms within it. Whilst a right of first refusal provision is not absolutely necessary, it is best practice to make your agreement as thorough as possible. You never know what may arise in future. It is sensible to be prepared for as many contingent possibilities at all likely to occur. It is possible to amend an agreement. However, getting things right from the outset is always a good idea.
Franchise Agreement
Right of first refusal clauses can also exist in Franchise Agreements. This follows a similar line to that in a Shareholders Agreement. It may apply to franchisees exiting a franchise system. The clause in this context might require the the leaving franchisee to offer their business to the franchisor. The Australian Government Business website contains guidelines on Franchise Agreements.
In leases
Leases may give tenants the first right to purchase a property when the lease comes to an end. Alternatively, it may give the tenants the option prior to the landlord selling the property on the open market. This may be the case even if the lease has not yet expired.
Common parts of the clause
The right of first refusal clause will generally have a few really important key terms. Simply having the clause is of little utility unless it is comprehensive enough to account for a number of factors. These can include the following:
- Time frame and the parameters of when the right of first refusal might be enacted and then how long that offer can last
- Commercial terms pertaining to the price of sale or fees that may coincide with payment structures
- Any relevant valuations for goods, services, or commodities outlined in the agreement
- Stipulations on how this particular clause might interact with other clauses in the contract. No clause in a contract can function in isolation so it is important to know what bearing this might have on other parts of the overall agreement
Each situation is different, and no contract the same. It may not seem relevant to you at the time, but including provisions for the future is always worthwhile. Things can change very quickly in business. Preparing for those changes is essential. If you are unsure about your situation, it may be helpful to seek the assistance of a contract lawyer.
Get a fixed-fee quote from Australia's largest lawyer marketplace.
