One of the most commonly used devices in real estate is the right of first refusal (“ROFR”). A tenant may be given a ROFR by a landlord to buy the leased premises if the landlord wishes to sell at any time while the lease is in effect. Or a buyer of a tract from a seller who owns an adjacent tract may be given a ROFR to buy the adjacent tract. Or a landlord may lease a portion of a building to a tenant with a ROFR to lease the balance before the landlord leases it to anyone else during the term of the lease.
The ROFR is used widely and often too casually; a landlord might insert the words: “The tenant has the right of first refusal to buy the leased premises” (and no more than that). The landlord may reason to himself, “How bad can it be? If the tenant exercises his right to purchase, I’ll still get my full purchase price.”
The problem with the ROFR, especially those which are too vague, is that they can become an enormous impediment to the leasing or selling of a property down the road. Very often a potential buyer’s interest is tenuous, and the slightest unforeseen impediment may cause him to lose interest in making a serious bid. If a tenant has a ROFR which gives him 30 days (sometimes 60 or even 90 days) to decide whether he wants to match an offer, the potential buyer may say that he does not want to wait that long and go on to the next project.
Or suppose two partners own a tract and give a ROFR to a tenant; they then decide that one partner wishes to buy the interest of the other partner; is that an event which would trigger the ROFR? Or, suppose the holder of a ROFR is notified that the owner has an offer to buy, and after the 30-day period in the ROFR passes, the holder of a ROFR decides not to exercise his right to purchase; the original offeror in the meantime has found another project and decides not to buy, leaving the owner with no buyer. Question: in this last illustration does the ROFR expire or must the owner again give the holder of the ROFR the right to purchase if another offer is received?
There are serious issues which anyone thinking of giving a ROFR to someone should consider: (a) every ROFR should specify the period during which the holder of the ROFR must exercise his right to buy or lease; the owner should make as short as possible the period to exercise, such as 15 days; (b) the ROFR should clearly state that the holder of it must match the exact terms and conditions of any offer if it is received; (c) the ROFR should be precise in describing how the holder must exercise his right (where and how to send notice); (d) it should state exactly what event triggers the right in the holder, and it should state that the holder of the ROFR has only one chance to purchase; i.e., if he opts not to and the original offeror decides not to buy, the ROFR should expire; and (e) the ROFR should specify how many months (or years) it will remain in effect, the shorter the better for the owner.
Because it can sound so innocuous, an owner is often easily seduced into giving ROFR’s to others for no consideration; and he often finds to his deep chagrin, the ROFR has become a burden that can substantially diminish the value of his property. If a decision is made to grant a ROFR, every effort should be made to make it precise, unambiguous, and complete; and the owner should spend time mulling the potential consequences of such a grant.
— Ken Butera