What is a Right of First Refusal?

Posted By Kilpatrick Townsend

One question we frequently get from clients, particularly those that are tenants, is: Do I need to have a Right of First Refusal in my lease? But more often than not, in the same breath, we get the question: What exactly is a Right of First Refusal? 

For many individuals, this is a term they hear thrown around a lot, but without much explanation. For today’s blog post, we asked Michael Myers of Kilpatrick Townsend to explain this concept in a bit for depth for our clients. If you are about to sign a new lease, or just curious about this topic, his explanation below is a great place to start! 

The concept of Right of First Refusal (oftentimes referred to as ROFR) has been around in real estate for a long time.  However, it is sometimes a difficult concept to fully understand, and yet it is becoming more and more common.  Below are few basic keys to understanding a ROFR.

Who is a ROFR for? 

ROFR are very often included in tenant leases where a tenant is leasing all or most of a building, however, a ROFR does not have to be a part of a lease and can simply be a standalone document between a landowner and a third party.  The tenant or third party who is given the ROFR has the right to step into the shoes of a potential buyer of a property who has made an offer on the property, and purchase the property in place of the potential buyer upon terms consistent with the potential buyer’s offer.

What is a ROFR not? 

A ROFR is not an option or a right of first offer (ROFO).  A ROFR allows a party to replace a potential buyer for an offer to purchase the property.  An option is where a party has a period of time where it is the only party that can purchase a property (usually for a pre-determined price) and the owner cannot sell to another party until that time has expired.  A ROFO is where a tenant or other third party is given the right to make a first offer on a property before the owner can review offers from other parties.

When is an ROFR considered? 

ROFR’s are becoming very common in leases for single tenant buildings.

What are the terms of a ROFR? 

A ROFR is an agreement between 2 parties and can include any terms the parties desire, however the most common form is to follow the same terms and conditions as set forth in the offer from the potential third party purchaser.

What happens if an ROFR is not exercised? 

If a party does not exercise their ROFR within the period time provided in the agreement the owner is free to sell the property to the 3^rd party.

We hope that this explanation of an ROFR provides a good starting place for you to understand whether or not it is something you should consider. Ask your broker whether a ROFR should be incorporated into your lease and what that might look like!