Right of First Refusal Explained: What Small Businesses Need to Know in Commercial Contracts

When you’re running a small business or are in the early stages of your startup journey, commercial contracts might not always seem like the most exciting part of your day. But, as your business grows and deals start rolling in-whether it’s a property lease, supply agreement, or sale of shares-the finer details in your agreements really matter.

One clause that regularly pops up (and can have a lasting impact on your business decisions) is the right of first refusal. If you’ve ever wondered, “Is this something I should care about?” or “What does it actually do for my business?”-don’t worry, you’re not alone!

In this guide, we’ll break down the essentials of the right of first refusal. We’ll cover what it means, why it’s so important in commercial contracts, the pros and cons for small business owners, and how to make sure you’re legally protected from day one. Let’s dive in.

What Is a Right of First Refusal?

Put simply, a right of first refusal (sometimes called a ROFR) is a contractual right that gives one party-usually a buyer, current shareholder, or tenant-the first opportunity to buy, lease, or otherwise acquire an asset before the owner offers it to someone else.

Here’s how it works in practice:

• You (the seller or asset owner) decide you want to sell a property, a share in the business, or any other valuable asset.
• Before you can take the offer to the open market (or accept a third-party’s offer), you must first give notice to the party with the right of first refusal and offer them the same deal.
• If they want to buy, you’ve got a deal (under pre-agreed terms). If they say no, you’re free to approach others.

It’s a common clause in all sorts of commercial agreements, from shareholder arrangements and partnership agreements, to property leases and distribution contracts.

Why Does Right of First Refusal Matter for Small Businesses?

At first glance, the right of first refusal might look like just another standard term. But in reality, it can make a huge difference to your flexibility and business strategy.

For small business owners, the key reasons why it matters include:

• Protection for Owners or Investors: If you’re a minority shareholder or have partners, a ROFR can protect your interests if someone wants to sell their share to an outsider.
• Preserving Relationships: In ongoing supplier or distributorship contracts, a ROFR can help keep valuable products or assets “in the family” before competitors are given access.
• Negotiation Leverage: Both buyers and sellers can use a right of first refusal as a bargaining chip when finalising deals or raising capital.
• Preventing Unwanted Newcomers: In privately held companies, it gives existing shareholders or members control over who they’re in business with (no surprise strangers at the board table).

On the flip side, not understanding these rights-or drafting them vaguely-can limit your ability to grow, restrict future sales, or even cause expensive legal disputes down the line. That’s why it’s important to get it right from the start.

How Does a Right of First Refusal Work?

Let’s look at a practical real-world scenario:

You’re a small business owner with two partners. You want to sell your interest in the business. Your shareholders’ agreement includes a right of first refusal in favour of the other partners. Before you can sell your shares to a third party, you must offer them to your existing partners on the same terms. Only if they decline, can you sell to someone else-usually, at no better price or terms.

A right of first refusal typically involves several key steps:

1. The selling party receives or wants to make an offer (for a lease, sale, shares, etc.).
2. They notify the right-holder (person/entity with ROFR), in writing, about the intended sale/offer.
3. The right-holder is given a specified period to accept or reject the offer (this is usually set out in the contract-often 14 to 30 days).
4. If the right-holder accepts, the deal is done between those two parties under agreed terms. If not, the seller is generally free to offer the asset to others (often not on better terms than those first offered).

The exact process can vary based on the wording of your agreement-that’s why professionally drafted contracts are vital.

Where Might You Encounter a Right of First Refusal?

You’ll find a right of first refusal used in all sorts of UK business settings, including:

• Shareholder Agreements: Especially common in private limited companies and startups, protecting the interests of existing shareholders or investors. See our guide to key shareholder contract terms for more.
• Commercial Leases: Giving a tenant first dibs to extend the lease or purchase the premises before it’s put on the open market. More details in our commercial leases guide.
• Supplier and Distribution Agreements: Protecting the ongoing relationship so a supplier can’t easily switch to a competitor without offering you the chance to match the deal.
• Franchise Agreements: If a franchisee wants to sell, the franchisor or other franchisees may have the first right to buy. Read about franchise agreements here.

As your business grows, the likelihood that these terms will affect you also increases. It’s a good idea to understand how they work-before they come up in your negotiations.

What Should You Watch Out For When Agreeing to a Right of First Refusal?

The right of first refusal can sound fair and straightforward, but there are plenty of pitfalls if you’re not careful. Here’s what to look out for:

• The Trigger: When exactly does the right kick in? Only if you receive a bona fide third-party offer, or even if you just want to sell? The definition needs to be crystal clear.
• Notice Procedure: How must you notify the right-holder-and how long do they have to decide? Vague notice rules can cause disputes.
• Matching Terms: Is the right-holder allowed to match any terms, or only cash offers? Can they make changes to the deal?
• Time Limits: How long do they have to exercise their right? You don’t want to be in limbo for months.
• What Happens Next: What if the right-holder refuses your offer, but then you can’t sell to the third party on exactly those terms? Can you offer it again? This can get legally tricky.

All of these points underline the importance of clear, well-drafted contracts. Generic templates or “handshake” deals can leave costly gaps-and you could end up losing money or business opportunities as a result.

Right of First Refusal vs. Right of First Offer: What’s the Difference?

It’s easy to confuse a right of first refusal with a right of first offer-but they’re not the same. Here’s a quick breakdown:

• Right of First Refusal (ROFR): The owner gets a third-party offer, and must then offer the same deal to the ROFR holder before selling to anyone else.
• Right of First Offer (ROFO): The owner must first approach the ROFO holder to negotiate a deal (before approaching third parties). If those talks fail, they can sell to anyone, on any terms.

For buyers and investors, a ROFR is typically more powerful-it lets you match deals others are willing to make. For sellers, a ROFO is more flexible, since it doesn’t tie you to someone else’s offer price.

If you’re unsure which one suits your needs, a contract law expert can explain the practical pros and cons (and draft the right clause for your deal).

Pros and Cons of Including a Right of First Refusal in Your Contracts

As with most legal rights, the right of first refusal comes with both advantages and potential drawbacks. Here’s what you need to consider as a business owner:

Benefits

• Gives Control Over New Entrants: Lets existing business partners or shareholders control who’s allowed to join, protecting your company culture and goals.
• Keeps Key Assets Within Your Network: Think offices, intellectual property, or supplier contacts-these stay with people you trust if there’s a transfer.
• Protects Investors’ Stakes: Investors (such as VCs or early shareholders) like certainty that outsiders can’t buy in without their okay.
• Helps Preserve Lease/Franchise Value: Tenants or franchisees get priority to renew or buy, which can mean smoother operations and more stability for you.

Potential Drawbacks

• Limits Flexibility and Sale Options: You might not be able to get the best deal or price, since others get first refusal before you can go to market.
• Can Delay Transactions: The right-holder’s response time can push back your timeline-potentially frustrating if you’ve got a hot buyer waiting.
• Scope for Disputes: If the clause is poorly worded, you may face legal wrangling over whether your sale triggered the right, whether the notice was valid, or if the deal terms are “equal”.

The bottom line? If you want a right of first refusal (or if someone wants you to grant one), balance protection with business practicality. Think about your future growth plans, funding options, and how much wiggle room you’ll need down the track.

How Should a Right of First Refusal Clause Be Drafted?

Not all right of first refusal clauses are created equal. For full protection, your contract should cover the following (and more, if your situation needs it):

• Clear Trigger Events: Precisely define what action activates the right (e.g. “on intended sale of shares” or “if a third party offers to buy the leased property”).
• Notice Requirements: Spell out exactly how the notice must be given and the information it should include (price, terms, third party involved, etc.).
• Acceptance Timeline: Specify a firm time period for the right-holder to respond (e.g. 14 days).
• Deal Terms: Define whether the right-holder must match all terms or only the financial ones (what about extras, like warranties?).
• Follow-on Rights: Explain what happens if the right isn’t exercised-can the deal change, and if so, does the right re-trigger?

It’s wise to avoid drafting these clauses yourself-legal agreements need to be tailored to your business circumstances. Our team of contract drafting specialists can either review or create bespoke clauses, so there are no surprises down the line.

Are There Any Legal Risks or Compliance Issues?

Yes. If your contract is vague, or if you ignore a right of first refusal when it’s triggered, you could face serious legal and financial consequences:

• Breach of Contract: Failing to honour an ROFR can result in the other party suing for damages, or even seeking an injunction to stop your sale or transaction.
• Deal Blocked or Delayed: Third party buyers may pull out if there’s uncertainty about whether a deal can go ahead.
• Problems with Lenders/Investors: Investors may decline to invest unless all business transfer rights are clear and enforceable.

UK law doesn’t automatically fix a poorly drafted clause-the courts will usually enforce the contract you’ve signed. That’s why it’s crucial to get advice and set up these terms correctly from day one. You can learn more about protecting your position and enforcing your contracts in our guide, 5 Crucial Clauses Every Contract Needs.

What Legal Documents Commonly Feature a Right of First Refusal?

If you’re looking over a contract, watch for right of first refusal clauses in the following documents:

• Shareholders’ Agreements-often a critical part of company formation or when bringing in new investors.
• Articles of Association-the company constitution may embed pre-emption rights or other similar restrictions on share transfers.
• Commercial Lease Agreements-especially where tenants wish to secure a right to renew or acquire the property.
• Franchise Agreements-setting out how franchisees or franchisors can buy or sell to insiders before going to external buyers.
• Supplier and Distribution Contracts-protecting supplier relationships from sudden switchovers to new competitors.

Need help preparing, reviewing, or negotiating these documents? Explore our Contract Review service to make sure you’re on solid ground.

Right of First Refusal and Business Growth-What Should You Plan For?

If you see your business expanding-bringing new shareholders on board, moving into bigger premises, or entering global supply chains-think long term when negotiating right of first refusal clauses. Locking in rigid terms now can limit your options for future deals, investments, or exits.

Ask yourself:

• Does this ROFR continue even after significant changes in business ownership?
• Should it apply to every sale-even minor ones-or only “material” transactions?
• What’s the plan if more than one party wants to exercise the right?
• Is the right intended to survive a change of control or merger?

Getting clear on these points-ideally with advice from a legal expert-will help you keep your growth plans on track and avoid nasty surprises down the road.

Key Takeaways

• The right of first refusal gives a party the first chance to buy or lease before the asset is offered to others, and is a common feature in commercial, shareholder, lease, and franchise agreements.
• An ROFR can help maintain control and stability in your business relationships, but it can also delay deals or restrict your selling flexibility if not carefully drafted.
• Key considerations include: what triggers the right, notice periods, deal terms, and procedures for re-offer if the terms change.
• Avoid vague or generic clauses; get your right of first refusal professionally tailored to fit your business’s exact needs and future plans. Don’t rely on templates or DIY wording.
• Poorly handled rights of first refusal can lead to contract breaches, disputes, lost deals, or financial penalties.
• Seek legal advice before signing or granting a right of first refusal-solid legal foundations will empower your business to grow safely.

If you have questions or need help drafting or reviewing a right of first refusal in your contracts, we’re here to help. Get in touch at 08081347754 or team@sprintlaw.co.uk for a free, no-obligation chat with our friendly UK legal team.