In 2016, we wrote about Rights of First Refusal (ROFRs), Rights of First Offer (ROFOs), and Purchase Options. In this later article, we focus on ROFRs as they apply to commercial property purchase, sale agreements, and leases and offer some tips to follow to ensure that your buyer, tenant, or landlord client achieves the greatest benefit possible from such rights.

Let’s review: ROFR is the right extended to a buyer or tenant, in a contract or lease, to acquire certain property OR expand into or take additional space in existing leased property, if and when a third-party extends a bona fide offer to the landlord or seller (which the landlord or seller is willing to accept) regarding the subject property.

If the holder of the ROFR exercises its right and matches the third party’s offer, the property or space must be sold or leased to the holder of the ROFR.

DO’S:

1. The more significant the property, such as an investor buying a major industrial or office property from one or more other co-investors, the longer the period should be allowed for exercising the ROFR. This permits, for example, the ROFR holder to obtain financing to close the purchase transaction successfully. BUT having said this, beware that the longer the exercise period for the ROFR, the more risk each party accepts as to market volatility and property value fluctuations, including the risk that the initial offeror will choose not to proceed. More on this below in DO #5.
2. For a tenant with the ROFR to expand into additional, unoccupied space in a leased property, be sure that: (a) the terms are very clear regarding the specific notice requirements which must be met by the tenant; (b) the lease rate is specified for the additional space acquired; and (c) there is an ample amount of time in which the ROFR holder can exercise its right.
3. The manner by which notice is conveyed has expanded due to technology. Therefore, it is critical that the method(s) of notice transmittal are specified in the contract or lease document so that the ROFR can be both workable and exercised properly.
4. In a multi-tenant property configuration, be sure to specify the particular units of unoccupied and/or adjacent space covered (or burdened) by the ROFR. Once this broker co-author specified the unit size, but not the specific unit, for which the ROFR was intended. When the tenant subsequently tried to exercise the ROFR, the landlord responded that the ROFR applied to several units within different buildings in the complex, but none were the unit that the tenant wanted in the first place!
5. In the current market, where construction pricing is skyrocketing, a tenant’s ROFR from even two years ago may be inadequate to limit the tenant’s rent and/or tenant improvement costs on the new/additional unit. For planning purposes, build in some sort of cap on rent and TI costs in the event of the tenant’s exercise of the ROFR for an adjacent or other unoccupied unit.

DON’TS:

1. Generally, ROFRs favor the tenant/buyer, and not the landlord/seller. With this in mind, keep the ROFR simple. In other words, don’t attach so many constraining conditions that inhibit the landlord/seller in its ability to otherwise convey the property to other parties, or the landlord/seller simply won’t grant the ROFR.
2. In joint-venture real estate transactions, rights of first refusal are commonly used, such that the joint venturers generally possess the right of first refusal to buy out the stakes held by other joint venturers who leave the venture. Do not skimp on details here, as once friendly joint venturers may find themselves locked in litigation when, in a rising market, the property values leave one party on the short end of the deal.

Remember, ROFRs are extremely effective in accomplishing planning objectives of the tenant, buyer, or joint venturers. If and when properly worded, a ROFR could also encourage doubtful landlords and sellers to board the ROFR train.