Quick overview

A Right of First Refusal (ROFR) clause in a loan forces the borrower to present a bona fide third‑party offer to the lender first. If the lender elects to match the offer within a set period, the lender can buy or otherwise acquire the asset under those terms. ROFRs most often appear in loans secured by real estate, business equity, or custom collateral arrangements.

Background and why it matters

ROFRs come from long‑standing property and contract practices designed to give existing stakeholders priority access to an asset. In lending, a ROFR helps the lender preserve value if the borrower tries to sell collateral that secures a loan. From the borrower’s perspective, a ROFR can slow a sale, limit bargaining flexibility, or alter the pool of potential buyers.

In my practice advising small business owners and real estate investors, I’ve seen ROFRs delay closings and force price renegotiations when lenders choose to exercise them. Knowing a ROFR exists early in negotiations prevents surprises at sale time.

Sources: U.S. Small Business Administration and Consumer Financial Protection Bureau discuss borrower protections and lender practices in related contexts (see https://www.sba.gov/ and https://www.consumerfinance.gov/).

How it works (step by step)

  • Trigger: The borrower receives an offer or decides to sell the collateral. The loan documents define what constitutes a trigger event.
  • Notice: The borrower must notify the lender and provide the material terms of the third‑party offer. The required evidence and form of notice are spelled out in the agreement.
  • Decision window: The lender has a specified number of days to accept or decline. Typical timeframes vary, so read the contract.
  • Match and transfer: If the lender elects to match, the borrower usually must complete the sale to the lender on the same terms. If the lender declines or misses the deadline, the borrower can proceed with the third‑party sale—sometimes subject to minor restrictions.

Real‑world examples

  • A commercial property owner listed a building and received a firm offer. Their loan contained a ROFR, and the lender exercised it. The sale closed to the lender instead, and the original buyer was moved out. The owner had to restart their exit strategy.
  • In acquisitions, a lender with a ROFR on business equity can block a preferred buyer, forcing the seller to renegotiate or wait for the ROFR to lapse.

Who is affected

  • Lenders: ROFRs protect collateral value and reduce forced recovery costs.
  • Borrowers: Expect slower sales and the need to include ROFR timing in exit planning.
  • Buyers: Third‑party buyers face uncertainty—knowing a ROFR exists can affect their willingness to submit offers.

Practical negotiation points and professional tips

  • Identify early: Ask for a copy of the loan agreements during due diligence to spot any ROFR or similar transfer restrictions.
  • Narrow triggers: Limit ROFR to specific types of sales (e.g., transfers of controlling interest) rather than all transfers.
  • Shorten timelines: Negotiate a brief decision window (for example, 10 business days) so sales aren’t stalled.
  • Carve-outs: Seek carve‑outs that allow sales to certain strategic buyers or under defined auction processes.
  • Consider indemnities: Require the lender to close within the same timeline and terms if they exercise the ROFR.

If you’re selling a business, see our guide on business exit timing and financing considerations in “Planning for Loan Maturity: Preparing a Refinance or Exit Strategy” and read about deal structure in “Business Acquisition Loans: Structuring the Deal.”

(Internal links: Business Acquisition Loans: Structuring the Deal — https://finhelp.io/glossary/business-acquisition-loans-structuring-the-deal/; Planning for Loan Maturity: Preparing a Refinance or Exit Strategy — https://finhelp.io/glossary/planning-for-loan-maturity-preparing-a-refinance-or-exit-strategy/)

Common mistakes and how to avoid them

  • Overlooking the clause during due diligence. Solution: have an attorney or advisor review all security and transfer provisions.
  • Assuming the lender won’t exercise the ROFR. Solution: plan for the lender to say yes; build time and alternative buyers into your timeline.
  • Failing to document the third‑party offer properly. Solution: keep written offers, proof of notice, and timestamps to prevent disputes.

Practical risk management

Treat ROFRs as a potential exit cost. Model scenarios where the lender exercises or assigns the ROFR, and quantify how each outcome affects proceeds, taxes, and transition plans. For business owners, compare the ROFR’s friction against alternative financing that avoids restrictive transfer rights.

Legal and tax considerations

ROFRs are contract provisions governed by state law. Tax consequences depend on the sale structure; consult a tax professional for specific reporting issues. This article is educational and not legal advice—engage an attorney to interpret the specific loan language.

Professional disclaimer

This content is educational and reflects professional experience and common practice as of 2025. It is not legal or tax advice. Consult a licensed attorney or tax advisor for advice tailored to your situation.

Further reading and authoritative resources

© FinHelp.io — For more on loan structures and exit planning, see the linked guides above.