The terms Right of First Refusal (ROFR) and Right of First Offer (ROFO) are often thrown around in real estate and corporate negotiations. Whether you are negotiating rights relating to stock/membership options, commercial lease expansions, or property purchases, the general terms have the same applicability. However, the provisions under each are unique and may impact your rights. For the purpose of this blog, we will discuss the rights relating to commercial real estate deal where the parties are anticipating an expansion of leased space.
Right of First Refusal
Under a ROFR, when a property owner desires to lease (or if applicable, sell) their property that is subject to the ROFR, they must market the property and obtain an offer from a third party. Upon receipt of that offer, the ROFR kicks in and the property owner must comply with the terms outlined in the ROFR provisions.
Generally, the property owner must provide the offer to the holder of the ROFR who will have a set amount of time to review the offer and either elect to waive its ROFR or elect to lease the space (or purchase if applicable). Basically, the holder has the final say of whether it will take the space or allow the third party tenant to lease the space after the property owner has likely expended funds to market the property and negotiate a good faith offer with a third party buyer.
Right of First Offer
Under a ROFO, a property owner generally decides that they are ready to lease the space (or sell the property if applicable) and presents an offer to the holder of the ROFO, prior to obtaining any offers from third parties. If the holder of the ROFO elects not to exercise their right on the terms outlined in the offer, then the property owner will have the right to market the property and lease it to another party.
Generally, once the holder of the right has waived their right, the property owner is free to market the property and obtain an offer from a third party, negotiate, and move forward with a lease. However, under either right, there are generally second chances for the holder to come back and exercise their right to lease the space. Additionally, many tenants (prospective purchasers) will negotiate both rights within their lease to ensure their full options are available.
For assistance in drafting or reviewing your commercial lease, or for assistance in reviewing your right of first refusal or right of first offer provisions, contact Ariel Bedell at The Loftin Firm, P.C. today!