Friday, December 2, 2016

Real Estate & Related Terms Explained: First Right of Refusal

As  we wrap up this series on leasing terms for the year, another confusing term/subject is on deck.  Although the definition is pretty literal, the application of it in the commercial leasing world isn’t so straightforward.

What Exactly Is A First Right of Refusal (FROR)?
A right of first refusal is a contractual right of an entity to be given the opportunity to enter into a business transaction with a person or company before anyone else can. If the entity with the first right of refusal declines to enter into a transaction, the owner of the asset is free to open the bidding up to other interested parties.  In the real estate world, this business transaction refers to the real estate premises in subject, be it commercial space, land, etc.

When Would A First Right of Refusal Apply?
The most common time when you see a first right of refusal applicable would be when a tenant is leasing a space, the landlord decides to sell, and the tenant has a first right of refusal to purchase the property.  Another common application would be when a tenant in a building is growing and as a neighbouring space becomes vacant, the tenant would have a first right of refusal to lease the additional space before the landlord can lease it to another tenant.

What Else Should I Know About A First Right of Refusal?
A first right of refusal is a term of a lease agreement that should be negotiated along with other terms at time of lease negotiations.  It usually states a date that relates to the first right and the mechanism for administering it.  The more thoroughly stated the better, so there are no disagreements later.  

To use an example: if a tenant has a first right of refusal on the building they occupy that states that should the landlord get a bonafide offer to purchase from a third party, the tenant will have seven days to match the terms of that offer.

The actual clause in the lease agreement will be more detailed but that covers the basis of it.

Obviously, a first right of refusal is a benefit to a tenant if they desire to own the building they are in someday.  It is a nice perk.  It is also a benefit to have a first right on neighbouring space, as being able to expand without moving is attractive.

On the landlord’s side, it is sometimes a detriment to have a first right of refusal when selling their building.  If a third party buyer knows that the tenant has a first right of refusal to match their offer, they might decide to not bother.  It really depends on the situation though.

As always, make sure to hire an experienced commercial realtor to negotiate terms in your lease, including first right of refusals!  Once again, this wraps up our series on explaining leasing terms for the year.  Hope it was informative.  If you ever have questions don’t hesitate to drop us a line.

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