First right of refusal clause

The Right of First Refusal is a provision commonly included in Commercial Lease Agreements, which imposes an obligation on the Landlord to offer the Tenant the opportunity to accept or decline the offer to purchase the property they are currently leasing. In simple terms, if the Landlord intends to sell the property, they must first offer it to the Tenant before advertising or presenting it to third parties.

 

Advantages for the Tenant include:

1. Exclusive opportunity: The Tenant has the first chance to purchase the property, giving them an advantage over other potential buyers.
2. Security for business operations: This clause serves as an insurance policy, ensuring that the Tenant retains the rights to the property if they wish to continue operating their business from there.
3. Time for alternative options: As most right of first refusal clauses specify a timeframe for accepting or declining the purchase offer, the Tenant is granted a period to explore other leasing opportunities. If they fail to find a suitable alternative, they have the option to purchase the property they currently lease.

 

Disadvantages for the Tenant include:

1. Time constraints: The Tenant will have limited time to decide whether or not to purchase the property, which may require organizing funds within a short timeframe if they choose to accept the Landlord's offer.
2. Enforceability: If the Clause is not well drafted it could be difficult to enforce, meaning it is possible you would have signed on for a Lease which is more favourable to the Landlord without there being any benefit to you.
3. Leverage: In exchange for granting a Right of First Refusal, the Landlord may expect certain more favourable terms for them to be included in the Lease. Negotiations are generally about leverage and the balance of give and take. You will have to expect to concede certain points in the negotiation in exchange for the benefit of the Right of First Refusal.

 

Advantages for the Landlord include:

1. Negotiation leverage: The right of first refusal clause can be a powerful tool to attract a Tenant and incentivise them to sign a lease agreement with potentially favourable terms that they might not have agreed to otherwise, considering the long-term security and potential ownership benefits.
2. Interested buyer: By securing a Tenant as a potential buyer, the Landlord ensures a deeper interest in the property compared to other parties, as the Tenant's business is already established there.
3. Cost savings: If the Tenant accepts the offer to purchase, the Landlord saves on advertising and agency fees.

 

Disadvantages for the Landlord include:

1. Delayed marketing: The Landlord is prohibited from advertising or offering the property to third parties until the Tenant either accepts or rejects the offer to purchase, or if the designated consideration period elapses without the Tenant responding, leading to non-performance of the clause. This can result in a delay in marketing the property.
2. Limited buyer pool: Attracting other buyers might be challenging, as potential buyers are aware that the Tenant has the first right to purchase the property.
3. Auction restrictions: Depending on the specific wording of the clause, the Landlord may be prohibited from taking the property to auction.

Factors to consider when Negotiating Right to first Refusal:

1. Time period for acceptance: Determine the duration within which the Tenant must accept or decline the offer to purchase the property.
2. Tenant's declining to purchase: As a Tenant, consider negotiating a clause that obligates any new buyer, in the event of the Tenant declining to purchase, to continue the lease agreement.
3. Selling complications: As the Landlord, be mindful of how the clause might complicate the sale of the property.
4. Breach of Condition: Breach of the right of first refusal clause by the Landlord would result in a contractual violation. In such cases, the Tenant may take legal action, seeking damages or specific performance.

 

How is the Value of the Property Determined?

The determination of the fair market value for the property depends on the specific wording of the clause. It may state that the Landlord proposes what they consider fair market value, allowing the Tenant a period to agree or disagree. If the parties disagree on the valuation, a pre-agreed third-party valuer may be involved, with their assessment being final. If the Tenant chooses not to purchase at the valuation price, the Landlord is then allowed to market the property but cannot sell it under more favourable terms than those offered to the Tenant.

It could also be negotiated if the Tenant purchases the property a percentage above or below market value, depending on your negotiations.

In conclusion, a right of first refusal clause can be a valuable negotiation tool for a Landlord to attract a Tenant and potentially secure a buyer. However, it can complicate the property sale process and restrict the Landlord's rights in dealing with the property. For the Tenant, enforcing the clause on the Landlord may be challenging if it is not drafted securely. 

HOW CAN OMNIA LEGAL ASSIST YOU?