Amidst all the economic havoc wrought by the global pandemic, the commercial real estate market has remained both profitable and highly competitive, attracting interest from business owners and both new and existing investors who view commercial real estate as a hedge against inflation. In this competitive climate, buyers and sellers cannot lose sight of significant legal provisions such as the Right of First Offer and Right of First Refusal often incorporated into commercial real estate transactions. Considering a Right of First Offer or Right of First Refusal can influence the price and accessibility of commercial real estate, effecting both advantages and potential drawbacks for buyers and sellers. These provisions are typically written into leases and business sale agreements and have severe implications in subsequent real estate transactions concerning properties encumbered by any such right. It is important to understand these concepts and be mindful of their presence in the context of a commercial transaction.
A Right of First Offer (“ROFO”) requires that the property owner (a “Seller”) give the holder of the ROFO (often the tenant) the first chance to buy the property before offering the property to a third party. The right holder has a specific amount of time to make an offer before the right expires. If the holder of the ROFO does not exercise their right to lease or purchase, the Seller can proceed in soliciting offers from third parties. The ROFO is a “first look” right often executed between the Seller and tenants, business partners, or other interested parties. However, simply holding a ROFO does not guarantee the sale of the property to the ROFO holder. The Seller is free to reject the offer and proceed with selling to a third party if an agreement cannot be made.
By contrast, the Right of First Refusal (“ROFR”) is a “last look” right that comes into play when a Seller receives an offer of purchase on its property. If the property is subject to a ROFR, the Seller must grant the holder of the ROFR the opportunity to purchase the property on the same terms and conditions offered by the third party. In this instance, the holder of the ROFR is compelled to make a purchase or leasing decision based on the terms previously negotiated by the third party. Assets with a ROFR attached can be more difficult to sell, because potential buyers may not want to go through the trouble of negotiating a deal that must be offered to another party first.
For sellers, the implications of an underlying ROFO or ROFR should be considered in advance when there is a desire or an effort to sell property. Failing to strictly comply with the terms of the ROFO and ROFR may render a seller liable for economic damages and cause other unforeseen consequences. If, for example, a Seller proceeds to enter into a purchase agreement with a third-party buyer to sell the property without strictly abiding by the ROFO or ROFR terms contained within a lease for that property, the Seller is exposing itself to liability from both its tenant and buyer. If the ROFR or ROFO holder elects to purchase the property, the Seller has now contractually agreed to sell the property to someone else and is faced with either breaching a contract or violating the ROFR/ROFO agreement. In practice, this often leads to a monetary settlement that can almost always be avoided with reasonable foresight and diligence.
On the flip side, buyers should also factor in the presence of a ROFO or ROFR in the due diligence phase of a transaction. This will not only alert a buyer to potential failures on the seller’s part to adhere to applicable ROFO or ROFR terms, allowing the buyer to then seek an appropriate remedy, but it will also put a buyer on notice of a continuing ROFO or ROFR that could be relevant in the future should said buyer ultimately assume any agreements with those provisions.
Remaining cognizant of ROFO and ROFR provisions is equally applicable in the context of commercial leasing. The implications of those provisions should not be overlooked by landlords and tenants given the similar liabilities that exist for ROFOs and ROFRs in relation to buying and selling real estate. Ultimately, it is beneficial to be proactive in approaching ROFOs and ROFRs, and whether you are a buyer, seller, landlord, or tenant, enlisting experienced legal counsel can help you avoid potential ROFO and ROFR pitfalls.
For more information or to seek counsel from our real estate law group, please reach out to request a consultation or call us at 216-696-1422.
