Right of First Offer Vs. Right of First Refusal

Sometimes a party leasing a parcel of property wants to have the right to purchase the parcel in the future, thereby protecting its leasehold investment in the property. The tenant typically asks for a right of first refusal to purchase the property if and when the landlord receives an offer. That is the key difference between a right of first refusal versus a right of first offer. The right of first refusal is triggered when a third party initiates an offer to the owner/landlord.

A right of first refusal is often seen by an owner as an impediment to selling the property because the owner is concerned that a third party will not want to incur the expense of drafting a contract and negotiating its terms only to have the property purchased by the tenant exercising its right of first refusal. This is a very legitimate concern for an owner.

A compromise might be to grant the tenant a right of first offer. The right of first offer is initiated by the landlord/owner when it decides to put the property up for sale. It must first offer it to the tenant before listing the property for sale to the general public. It may not be a total protection for the tenant, but it is a reasonable compromise.

The tenant will want to negotiate some price and timing protections so that the landlord is not able to offer the property to the tenant for unfavorable terms and then list it for more favorable terms to the public. The landlord should also limit the offer to a one-time situation such that if it does not achieve a sale to the public when it first offers the property it is not required to offer it again to the tenant. The landlord should also condition the right upon the tenant not being in default. It may also insist that it is personal to the tenant and is not available to any assignees. The landlord must also make sure that a transfer to the lender by way of foreclosure or deed in lieu of foreclosure is exempted from the right of first offer.

The tenant may also want to protect its interest by recording a memorandum evidencing its rights so as to make sure that the landlord does not go behind its back and sell the property without the tenant’s knowledge. If a memorandum is recorded, appropriate releases of this right should also be held by the landlord in escrow so as to release the title encumbrance when and if the tenant does not exercise its right to purchase.

These rights are difficult to negotiate and document, and the other South Florida real estate attorneys at our firm and I have a great deal of experience in negotiating and codifying them on behalf of landlords as well as tenants. We write regularly in this blog about important legal and business matters affecting commercial real estate in Florida, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to receive all of our future articles.