The Right of First Refusal (ROFR) is a common provision in commercial leases that allow landlords to lease or sell the property to the tenant based on the terms and conditions of the binding contract. It is an agreement that a tenant has with a landlord to lease additional space in a building. It is a powerful tool for existing office tenants, for it gives them the right to match an offer from an interested third party. The rights of first refusal can be a win-win device that can enhance a business operation. To effectively negotiate the right of first refusal, it is essential to know how it works.
How a Right Of First Refusal Works
Typically, a tenant will request a right of first refusal (ROFR) to protect expansion space in a building. In a situation where the tenant is the sole tenant in the building, a ROFR may be asked to acquire the right to purchase the building.
Right of first refusal clauses can be customized to accommodate variations of the standard agreement. For example, changes such as the length of the validity of the right as well as the nomination of a third-party buyer can be included in the agreement.
Negotiating a Right of First Refusal
Too often, the rights of first refusal agreements are not clearly defined. They do not clearly explain what will happen when a right holder exercises that right.
When negotiating the right of first refusal, corporate tenants can ask the following questions:
When are you notified about a 3rd party offer? After a written offer or once an office lease has already been negotiated? It’s also important to specify how long you have to decide whether to match an offer.
How long do you have to exercise your right of refusal when an offer has been made?
Will you have the right to inspect the available space before exercising your right of first refusal in case there have been any changes in the space?
Is the ROFR a one-time option?
Does the right of the first refusal continue through the term of your office lease?
Does the right of the first refusal continue even if you do not lease the office space? Or will the third party renewal option override your ROFR?
Does the ROFR include office spaces anywhere in the building or only spaces close to your original office space?
Will your renewal rights be the same as the ROFR if you exercise your right of first refusal and lease the space?
If you lease the office space, will you need to meet the new office terms or will your existing lease terms be amended to match the new terms?
Negotiating the right of first refusal can be extremely complicated. Therefore, it is essential to work with a tenant rep to ensure you negotiate terms that you understand and are excellent for your business operations.