Reading time: 5 minutes

A right of first refusal grants one party certain rights before these become available to anyone else. Overall, this is a contractual right that benefits businesses by ensuring they will not miss commercial opportunities which arise. This article sets out how the right of first refusal operates and how this clause may impact your business.

What is the Right of First Refusal?

A person holding a right of first refusal has the option to accept a business offer before anyone else. This right covers most assets, including business transactions and real estate. For example, a business owner may have the first right to consider buying or selling a supplier’s goods. If the business owner chooses not to exercise their right, the other party will usually be entitled to offer the right to another business or deal to external third parties.

What Types of Contracts Include a Right of First Refusal?

There are a variety of types of contracts which may include a right of first refusal clause, including:

Shareholders Agreement

Shareholders leaving a company may be obligated to first offer their shares to the existing shareholders of the company first, under a shareholders agreement. If this offer is not taken, the leaving shareholder may then offer the shares for sale on the market.

This benefits the remaining shareholders by ensuring that existing shareholders will continue to control the composition of their company. This is particularly crucial if there are substantial voting rights attached to the shares.  

Franchise Agreement

Franchise agreements sometimes require franchisees exiting the system to first offer to sell their business to the franchisor.

This benefits the franchisee as they may save costs that would have otherwise been spent on a business broker or advertising the business. Additionally, the franchisor will benefit from either the opportunity to operate the business or sell it at a profit.


Leases may grant tenants the first right to purchase a property when the lease comes to an end or prior to the landlord selling the property.

This may provide a sense of security to the tenant while saving the landlord agency and advertising fees.

General commercial contracts General commercial contracts also include rights of first refusal. For example:

  • distribution agreements may require that distributors have the first right to obtain exclusive distribution rights for new products which the supplier creates; and
  • service agreements may require that the client grants the service provider the right to provide particular services, prior to engaging another service provider.

What Are Key Terms in a Right of First Refusal?

When reviewing a right of first refusal clause, key terms to pay attention to include:

Time frame The clause should specify a time frame in which a party can exercise their right of first refusal. Without a time frame, the right may be open-ended and restrict the other party’s ability to deal with third parties. However, the specified time frame should not be overly short. For example, a franchisor should have sufficient opportunity to conduct research and risk analysis before purchasing a franchise business.
Commercial Terms

The clause should indicate which party will decide on the commercial terms of the offer.

For example, whether the franchisee or franchisor should decide on the sale price of the franchisee’s business.

If the franchisor accepts the price, the clause should also answer whether the franchisee may still sell the business in the market for an equal or lesser price.

Valuation The clause may include provisions as to the valuation of commercial terms. For example, an independent third party may be appointed if there is a dispute as to an asset’s value.
Other Terms

Crucially, the right of first refusal clause does not operate in isolation from other terms in a contract.

For example, if existing shareholders are unable to purchase the shares of an exiting shareholder, other clauses of the contract may still require the purchaser to be approved by the existing shareholders.

What is the Right of Last Refusal?

The right of last refusal operates differently from the right of first refusal. Instead, in the period between negotiating and finalising a contract, the party with a right of last refusal should have the opportunity to make an offer. Using the example of a distribution agreement, a right of last refusal would operate as follows:

  • a supplier searches the market for a new distributor to distribute their new products;
  • the supplier receives an offer from a third party to distribute the new products; and
  • prior to finalising the distribution agreement with the third party, the supplier must offer their original distributor the right to enter into a distribution agreement. Only after the original distributor refuses may the supplier complete the new distribution agreement with the third party.

In this example, the right of last refusal provides the distributor with commercial insight by allowing them to observe the market rate of distribution agreements.

However, third parties may become deterred from negotiating after learning the original distributor may accept the supplier’s offer. Consequently, a right of last refusal clause in this context is to the supplier’s detriment.

Key Takeaways

A right of first refusal is commonly used in commercial contracts to the benefit of both parties. However, both parties should analyse the operation of the clause to determine whether it operates to their advantage. As such, before including a right of first refusal clause you should consider whether:

  • you are granting or receiving the right of refusal;
  • the contract provides specific and sufficient time frames and defines commercial terms;
  • you require a valuation clause; and
  • you or the other party require additional rights such as a right of last refusal.

If you require assistance drafting or reviewing a right of last refusal clause, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.


Everything You Need to Know about SaaS Agreements

Thursday 7 April | 11:00 - 11:45am

Understand which contracts will protect your SaaS contract from risk, and how. Register for free today.
Register Now

What to Consider When Buying a Tech or Online Business

Wednesday 13 April | 11:00 - 11:45am

Learn how to get the best deal when buying a tech or online business. Register for our free webinar today.
Register Now

Corporate Governance 101: Responsibilities for New Directors

Wednesday 27 April | 11:00 - 11:45am

If you are a new company director, join our free webinar to understand your legal compliance obligations. Register today.
Register Now

Rogue Directors and Business Divorces: How to Remove a Director

Thursday 28 April | 11:00 - 11:45am

Removing a board director is not simple. Join our free webinar to learn how to handle rogue directors. Register today.
Register Now

Employment Essentials for Tech Businesses

Thursday 5 May | 11:00 - 11:45am

Protect your tech business and your employees by understanding your employment legal obligations. Register for our free webinar today.
Register Now

How to Protect and Enforce Your Trade Mark

Wednesday 11 May | 11:00 - 11:45am

Protect your business’ brand from copycats and competitors. Register for this free webinar to learn how.
Register Now

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer