Common usage of the expression “right of first refusal” in the marketplace attests to the frequency of commercial arrangements where an owner gives a preference to someone to buy an asset from them in they event it is to be sold. For example, the right might be part of a tenancy agreement or even bequeathed by last will. Much turns on the precise intention of the parties involved and the legal drafting they settle on.

At one end of the scale, the property owner conferring the right might merely be humoring the expectant buyer, intending to meet their obligation by offering it first to them at an unrealistic price and once rejected, selling to another at market price, or even below market to an associate. In that case a disappointed buyer might have some remedy on the basis of misrepresentation or misleading behaviour, but their claim is doubtful if their agreement made it clear and plain that this might happen without any recourse.

On the flipside is an obligation on the owner for any sale to be to the expectant buyer unless someone is willing to pay more. This is colloquially abbreviated by some as a right of first and last refusal. In between these 2 poles are many variations. For example, after the first refusal, the property may be freely sold unless it is on terms materially more favourable than those first offered. Another is that the first offer must be, objectively, at the market price and independent valuers can be enlisted to ensure it. In other words, the legal drafting of these clauses is critical as the right is not a settled legal concept.

Unlike an option, a right of first refusal appears to confined to a personal, contractual interest not capable of amounting to an interest in land which would justify a caveat or a Court order of specific performance. In Octra Nominees Pty Ltd v Chipper [2007] a decision in the Federal Court of Australia, Honourable Justices Tamberlin, Gyles and Gilmour warn against interpreting a right of first refusal as a kind of proprietary interest enforceable against third parties. In that case, a tenant declined to accept an offer to them to purchase the freehold which was then sold to a third party for the same price. The time stipulations in that contract of sale were subsequently varied to the buyer’s benefit. The tenant then ambitiously embarked on proceedings, with some early success, effectively seeking to be substituted as the buyer under the terms of the amended contract. Tamberlin, Gyles and Gilmour held that the tenant only had a “right of first refusal, not of first and last refusal. Thus, in the absence of any suggestion of bad faith, prior arrangement, fraud, mistake or misrepresentation, the contract may be later varied between the grantor and the third party purchaser, and this will not revive the right so that a new offer must be made on the varied terms to the grantee. The right is exhausted when an offer to sell is rejected and the offer or a less advantageous offer is accepted by a third party.”

The judgment talks about the limits of rights of first refusal, in particular that they should be exhausted once a contract of sale has been properly entered into and not enlivened by a subsequent change in that contract. There is an implication in the judgment that a clause that appears to enliven the right upon contract variations would cause too much commercial uncertainty to be enforceable.