In commercial real estate, it always pays to think about the future when the needs of either the landlord or the tenant may change.
To this end, two common expansion clauses tend to pop up: the right of first offer (ROFO) and the right of first refusal (ROFR). While they sound pretty similar, they offer vastly different levels of control to landlords, tenants, buyers and investors.
What’s an ROFO?
The right of first offer gives a tenant or a potential buyer the chance to make the first move when a property owner decides they want to either lease or sell. In other words, the property owner can’t market their property without first offering it to the party with the ROFO.
How might this be an advantage? Imagine you’re leasing a commercial building, and you have an ROFO. The landlord decides they want to liquidate some of their holdings, but your ROFO requires them to come to you and say, “I’ve decided to sell. Do you want to make an offer?” You then have the opportunity to either put in your bid or pass.
While there’s no guarantee that you’ll eventually agree on the terms with your landlord and seal the deal, it does give you a chance to put in a bid. The seller cannot take a deal that’s less favorable than what you offer, but they can look around to see if they can secure a better offer.
What’s an ROFR?
The right of first refusal gives tenants or would-be buyers a little more power because it gives the tenant the right to match any offer the property owner gets from another party – and priority over other buyers.
Essentially, this means that if someone comes to your landlord and offers them a half million for the building you lease, the landlord can’t accept the deal without giving you an opportunity to match the price. This can allow a tenant to obtain a property at a fair market price without worry that they’re bidding too high.
When negotiating a commercial lease, you don’t need a crystal ball – but you would be wise to have some experienced legal guidance when you’re trying to best anticipate what may come.