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We’ve been discussing options that commonly arise in real estate leases and purchase transactions. Previously we dealt with option negotiation strategies, after the option is negotiated, and real estate purchase options.

RIGHT OF FIRST REFUSAL

Tenants have at times successfully negotiated a right of first refusal to purchase the underlying property. Landlord/owners may be more amenable to giving tenants a right of first refusal rather than an option to purchase. A right of first refusal is a close cousin to a purchase option. Tenants may be able to negotiate the right of first refusal particularly where the landlord/owner is not in a strong bargaining position. Tenants are greatly benefitted by negotiating a right of first refusal and owners/landlords are greatly harmed.

Multiple legal and practical problems arise where a tenant holds a right of first refusal. First, the right of first refusal restricts the landlord from obtaining the highest and best price. Prospective buyers simply do not want to go through an extensive due diligence process to prepare an offer on a property only to see the tenant sit back and meet the offer.

Second, prospective buyers may not be interested in waiting while a tenant considers the offer made by that buyer.

Third, complications may also arise relating to the deal terms. For instance, if a prospective buyer makes a cash offer, can the tenant meet that offer by offering terms and other financial conditions? Disputes are sure arise in those settings.

CONCLUSION

Options are strategic tools for both landlords and tenants and involve a number of decisions, choices, and business opportunities. Preparing a real estate option to renew, a right to purchase or a right of first refusal should be carefully reviewed with a knowledgeable realtor and real estate attorney.

Lat J. Celmins

lcemins@mclawfirm.com