What Is A Right Of First Refusal? (2025 Updated)

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When dealing with other businesses, being given exclusive access or a first offer often eliminates a lot of needless competition. In today’s fast‐paced commercial landscape, and particularly in 2025, rights such as the right of first refusal continue to be a vital strategic tool in cementing long‐term business relationships.

Holding the right of first refusal means the party who possesses the right is entitled to receive a specific offer before it is made available to anyone else. This clause plays out in many contexts – for example, it can determine whether a franchisee is able to sell their business to the public initially, or dictate the process for shareholders to sell their shares before the offer is extended externally.

Overall, the right of first refusal is not only a measure of security but also an incentive to enter into a contractual relationship. However, as with many other contractual clauses, it should be crafted and reviewed by a legal professional to ensure that all key risks are covered, especially in the evolving regulatory climate of 2025.

In this article, we’ll explore what a right of first refusal involves and how it can support your business transactions and strategic activities in the current market environment.

What Is A Right Of First Refusal?

The right of first refusal is typically not an implied right; it must be expressly stated in an agreement. In other words, it should be crystal clear in the contract so that all parties understand exactly how it operates.

When such a right has been granted, the grantor is obliged not to sell a particular asset or product to any third party without first offering it to the individual or organisation who holds that right.

Once an offer is made to the holder of the right, they are free to either accept or decline it. If the offer is declined, the seller is then free to seek other purchasers. It’s a mechanism that ensures the intended party remains at the forefront of potential transactions.

Some important points about a right of first refusal include:

The right creates an obligation on one party to offer the sale of a particular good or asset to another party first if the seller decides to dispose of it.
It is a contractual clause that must be drafted with precise language.
As a contractual commitment, a right of first refusal is legally enforceable.
Right of first refusal clauses are distinctly different from exclusivity clauses, which govern exclusive business dealings rather than providing prioritised purchasing opportunities.

How Does A Right Of First Refusal Work?

A right of first refusal can vary depending on the business context. Let’s look at an example to illustrate how it works in practice.

Example
Hannah, who has been operating a cosmetics franchise for six years, now feels it’s time to move on to other ventures. She plans on selling the franchise. However, her contract stipulates that she must first offer the sale to the franchise owner. Consequently, Hannah informs Monty, the franchise owner, of her intention to sell along with her asking price. Monty, recognising an opportunity to expand his portfolio, accepts Hannah’s offer. If Monty had declined, Hannah would have been free to offer the franchise to other potential buyers.

What Does A Right Of First Refusal Look Like In A Contract?

The wording of a right of first refusal clause will vary depending on the type of commercial relationship involved. For instance, in the franchise scenario described above, the clause will differ from one written for the sale of shareholder interests. Whether you’re dealing with franchise agreements or shareholder arrangements, the clause generally includes specific elements such as:

Clearly specifying who is entitled to the right of first refusal
Establishing a reasonable timeframe for the offer to remain open
Outlining any processes for determining the valuation of the asset on sale
Defining dispute resolution and negotiation procedures
Detailing the terms of payment for the purchase

The clause should also be harmonised with other parts of the contract. To ensure you’ve covered all essential aspects, it is crucial to seek advice from a legal professional – consider our contract review and redraft services to help fine-tune your agreements.

Butchart & Anor v Sinnamon & Ors [2025]

The importance of precise wording in right of first refusal clauses is well illustrated by the case of Butchart & Anor v Sinnamon & Ors [2025].

In this recent case, Mr Sinnamon owned two properties – Lot 30 and Lot 31. He had sold Lot 31 to Mr Butchart, and their agreement stipulated that if Mr Sinnamon ever decided to sell Lot 30, Mr Butchart would have the right of first refusal. When Mr Sinnamon proceeded to sell Lot 30 to another buyer, Mr Butchart claimed that the clause had been breached. However, Mr Sinnamon argued he had duly offered the property to Mr Butchart, who declined due to the absence of a structured payment plan that accommodated a 12-month settlement period. The court ruled in favour of Mr Sinnamon, emphasising that the clause did not provide for extended payment arrangements. This case underscores the necessity of clear and current clause wording to avoid costly disputes.

How To Enforce A Right Of First Refusal

Since the right of first refusal is an integral component of a contractual agreement, it is a legally enforceable clause. However, it only comes into effect when a sale or a potential transaction arises. The enforceability of this right is contingent on strict adherence to the procedures outlined in the contract.

For instance, in a Shareholders Agreement, if an existing shareholder wishes to sell their shares, they must first offer them to the current shareholders. Failure to comply with this process can result in a breach of contract. Regularly reviewing your contractual clauses in line with the latest legal standards – as outlined in our article on what constitutes a legally binding contract – is essential to ensure your rights are effectively protected.

Moreover, with regulatory reforms introduced late in 2024, enforcement mechanisms for rights of first refusal have been further refined to support fair trade practices and resolve disputes more efficiently. Ensuring your contract reflects these updates is paramount, and our team is here to help you navigate these complexities.

How Is This Different To An Exclusivity Clause?

An Exclusivity Clause differs significantly from a right of first refusal. While an exclusivity clause prevents a business from engaging in certain commercial interactions – such as selling exclusively to one client or within a defined geographic area – a right of first refusal grants priority access to an offer of sale rather than restricting transaction partners outright.

The holder of a right of first refusal has the option to either accept or decline the offer when it arises, whereas an exclusivity clause continuously restricts certain business dealings from the moment it is signed until the contract is terminated. In essence, exclusivity clauses safeguard ongoing relationships, while rights of first refusal provide an opportunity-based advantage. For guidance on drafting robust contractual clauses that reflect current market realities, you might find our contract review and redraft services useful.

Looking ahead into 2025, it is more important than ever to regularly review and update your contractual terms. As market conditions and regulatory requirements evolve, ensuring that clauses like the right of first refusal remain clear and enforceable will protect your interests and foster stronger business partnerships. Our comprehensive legal review services can help you stay ahead of the curve.

Key Takeaways

Right of first refusal clauses, when drafted correctly, can safeguard the interests of all parties involved. Here are the key takeaways:

They ensure that a designated party receives an offer to purchase before the asset is made available to others.
If the offer is declined, the seller is then free to seek another purchaser.
Because they are contractual clauses, rights of first refusal must be drafted with precision to avoid ambiguity and potential disputes.
These clauses are distinct from exclusivity clauses that govern broader commercial interactions.
Regular reviews and updates in line with current regulations are essential to ensure enforceability in today’s business environment.

If you have any further queries regarding right of first refusal clauses, or if you need legal assistance with drafting or reviewing your contracts, please reach out to us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations consultation.

Sapna Goundan

Sapna has completed a Bachelor of Arts/Laws. Since graduating, she's worked primarily in the field of legal research and writing, and she now writes for Sprintlaw.

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