Limit Tenant’s Right of First Refusal to Buy Space

It’s an undertaking for any tenant to scout out prospective commercial space, negotiate a lease, and then deal with the logistics and expense of moving into that space. So, after going through all of the effort to get established at a property, it’s not unusual for a big tenant that’s leasing an entire building to ask for a “right of first refusal”—that is, a right to buy the space if and when a third party offers to buy it. If the tenant is happy in its space, it won’t have to move, and presumably larger tenants have the funds to purchase it.

If you have a desirable enough tenant, you may agree to give it this right. There are downsides however: A right of first refusal may scare away prospective third-party buyers. A prospective third-party buyer probably won’t want to spend time and money negotiating a sales contract on space that a tenant could snatch away at the last minute by exercising a right of first refusal. A right of first refusal could create other problems for you too on the tenant’s end of the spectrum. Namely, you could get sued if you forget to notify the tenant before selling to a third party.

A helpful way to restrict that right is by placing a limit that requires the tenant to meet certain conditions, such as these, before it’s allowed to exercise the right of first refusal:

• Tenant isn’t in default. Don’t reward a defaulting tenant by letting it exercise a right of first refusal. Rather, bar a tenant that’s in default from exercising the right.
• Tenant hasn’t assigned or sublet. Don’t let a tenant that has assigned or sublet some or all of its space exercise the right of first refusal. A tenant that’s no longer using all of its space shouldn’t benefit from this right. Nor do you want any other entity—such as an assignee or subtenant—to take over the tenant’s right of first refusal. You’re giving the original tenant this right in the context of the deal you’ve negotiated. No other party should reap the benefits.
• Tenant isn’t holding over. A tenant whose lease term has ended but is refusing to move out shouldn’t be entitled to exercise a right of first refusal. If the tenant has exercised a termination option, then the refusal right should automatically become null and void, releasing the owner from the obligation to offer the premises to the tenant.

For 11 more owner-favorable restrictions you can place on a right of first refusal clause, see “Negotiate Circumstances for Tenant to Buy Its Leased Space,” available to subscribers here.