Clearly Limit First Refusal to a One-Time Right

Landlords may agree to grant tenants a right of first refusal to buy or lease space in the shopping center or building. While this can help lure an attractive tenant, the first refusal right may make the space harder to lease or sell to a third party later. That’s why you should make it a one-time right only. 

In other words, you should give the tenant the opportunity to exercise its right of first refusal only for the first lease or purchase offer you receive. This way, the right of first refusal won’t come back to bite you every time you get an offer for the space.

Unfortunately, if your lease is like many that we’ve seen, the language that you think bars the tenant from exercising its first refusal right more than once may leave room for subsequent exercises.

First Refusal Clause Is Too Ambiguous

A California landlord learned this lesson the hard way. The lease gave a tenant a right of first refusal to buy a building. The actual language: 

Tenant’s rights under this Section. . . shall remain in effect only until such time as Tenant shall first have had the opportunity to accept Landlord’s Offer under this Section. . . and if Tenant does not timely and properly accept Landlord’s Offer at such first opportunity, then this Section. . . shall be of no further force and effect whatsoever.

The landlord got an offer from a prospective buyer and notified the tenant, which elected not to exercise its right of first refusal. But the sale fell through and the landlord ended up selling the building to another purchaser without notifying the tenant. So, the tenant sued the landlord for not giving it the opportunity to exercise its right of first refusal on the subsequent purchase offer. You already had your chance, the landlord argued, and asked the court to dismiss the case without a trial. 

The California appeals court rejected the motion, reasoning that the first refusal clause was ambiguous as to whether the tenant was entitled to the opportunity to buy the property only the first time there was a potential sale or once each time there was a potential sale. Result: The case had to go back down for a trial to determine what the language actually meant [San Diego Watercrafts, Inc. v. Wells Fargo Bank, NA, 125 Cal. Rptr. 2d 499]. 

Solution: Clarify ‘One-Time’ Right in Lease 

Don’t let this happen to you. When granting a right of first refusal that you intend to be a one-time opportunity, make sure the lease clearly states that it’s a one-timer and that if the tenant fails to exercise it on the first offer, it loses the right forever. For added protection, the clause should also ban the tenant from assigning or transferring its right of first refusal to anyone else without your prior written consent while giving you sole discretion to withhold that consent. 

Model Lease Language

1. During the first ___ months of the Lease, Tenant shall have a one-time right of first refusal to lease space located at [insert location].
2. The parties hereto understand and agree that Tenant’s rights under Paragraph a hereof extend only to the first instance of exercise of this right and that in the event that Tenant fails to exercise its right of first refusal or fails to timely exercise such right, Tenant shall have forever lost its opportunity to do so and no further right of first refusal shall exist.
3. It is further understood that the right in Paragraph a hereof is special to named tenant herein, and shall not be assigned by Tenant without Landlord’s prior written consent, which Landlord may withhold in its sole and absolute discretion.