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A right of first refusal, also known as a "preemptive right," is a right to purchase in advance of all others on specified terms, but it is only triggered if the owner decides to sell.1 Rights of first refusal can exist in real estate,2 corporate securities,3 franchise agreements, oil and gas leases,5 employment contracts,6 and all sorts of commercial assets.' Most preemptive rights are created by the agreement of the parties; however, both Congress and state legislatures have provided for statutory rights of first refusal, usually to protect franchisees, tenants, or farmers.8
Most rights of first refusal allow the rightholder to purchase at the same price offered by a third party. However, parties may sometimes arrange a "fixed price" right of first refusal that permits the rightholder to preempt a third party at a prearranged price, even if the third party offers a higher price. Because of judicial hostility to these arrangements,9 as well as the unpredictable costs that such rights may impose on the contracting parties,' these "fixed price" preemptive rights are rare.
While the law generally favors the assignability of contractual rights,12 contracts that are deemed "personal" cannot be assigned or devised.13 In the context of preemptive rights, deciding the assignability raises numerous questions of common law property, freedom of contract, and rules of construction for contracts, deeds, and wills. The courts have not yet devised a coherent framework for deciding when a right of first refusal can be assigned, and the varied contexts in which such rights arise greatly complicate the problem.
In some cases, moreover, the issue will be of little practical consequence, especially if the encumbered property is freely alienable after the preemptive right has been exercised. For example, if a right of first refusal is declared "personal" by the courts, what can prevent the rightholder from exercising that right on behalf of a third party, to whom he can later sell the underlying property?" How can legislation (or judicial rules) be crafted to prevent such circumvention without imposing draconian restraints on alienability?" If such rules are impossible to develop in certain situations, does that make all preemptive rights de facto assignable?
Despite these objections, the courts should develop a default rule that rights of first refusal are personal,...