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Right of First Refusal or Right of First Offer for Tenant Leases - A Discussion

Rights of First Offer or Rights of First Refusal are sometimes used in residential leases when the tenant believes that they may be interested in buyingt the property they are leasing at a later date if the seller ever decides to sell while they are a tenant. Both are useful tools for the realtor, but they have significant differences.

The right of first refusal means that if the Landlord puts the property on the market for sale and is successful in selling the property, they must first offer the proerty for purchase to the tenant at the same terms and conditions as the accepted third party purchase offer.  This is sometimes difficult for the Landlord to accept as it puts a significant negative issue which the Landlord must deal with in marketing their property as buyers are reluctant to spend the time to fully negotiate a purchase contract if they know that the Seller must still present it to the Tenant.

I think that most landlords are very reluctant to grant a right of first refusal to a tenant because it does severely hamper their attempt to market the property. I sometimes have had success in negotiating a right of first offer, which means that when the landlord wants to sell that he must first negotiate with the tenant, and if an acceptable price is not negotiated, then the landlord may then attempt to sell , but only for a price greater than the offer made by the landlord. Typical provisions include providing that the landlord is not required to resubmit an offer, once rejected by the tenant, except for specific threshold changes (such as a price reduction by more than "x"percent), and the reduced offer from the third party must be submitted to the tenant essentially as a right of first refusal at that point.

This often is much more palatable to a landlord, as after negotiating a potential sale with the tenant ( who the landlord should be willing to negotiate with first as they are the logical buyer for the property ) but with no sale agreed to, if the landlord believes that he can sell the property for more than the tenant is willing to pay,  the landlord is free to market the property with the knowledge that he can market the property unencumbered as long as the price exceeds the last offer extended to the tenant.

It is important that anyone attempting to incorporate these rights in their lease carefully draft these provisions and to use an experience realtor to assist them.

The following is wording I have used for rights of first refusal:

1.Landlord hereby grants to Tenant the right of first refusal with respect to any sale of the Premises
2. Notice of Acceptable Offer.  If at any time during the term of this right of first refusal, Landlord receives an offer acceptable to Tenant for the purchase of the Premises, then, Landlord shall forthwith forward a copy of such offer (the "Acceptable Offer") to Tenant.
3. Exercise by Tenant. Tenant shall have a period of 7 days after receiving such copy of the Acceptable Offer within which to notify Landlord that Tenant elects to purchase the Property on the terms contained therein (except for any terms not relevant to the Tenant's purchase of the property such as contingency clauses, etc.). Any such notice from Tenant shall be accompanied by any earnest money required under the terms of the Acceptable Offer, which shall then constitute a contract between Landlord and Tenant even though neither has signed it.
4. Waiver by Tenant. If Tenant does not notify Landlord within the 7 day Period mentioned in the preceding paragraph of Tenant's election to purchase such property, Landlord shall be free to sell such property to the person who submitted the Acceptable Offer (or to such person's permitted assigns) on the terms specified therein, and Tenant shall upon request execute and deliver an instrument in recordable form appropriate to evidence Tenant's relinquishment of its rights under this agreement with respect to such transaction.  Notwithstanding any such relinquishment, Tenant's rights under this agreement shall remain in effect if the transaction contemplated by the Acceptable Offer fails for any reason to close, with respect to any subsequent offer to purchase the Premises covered by such Acceptable offer.
5. Term. The term of this right of first refusal shall coincide with the Term of the Lease including any extensions or renewals thereof
6) If Tenant exercises this right of first refusal, Landlord will apply one half of the rent paid by Tenant through the closing date of the Tenant's purchase against the purchase price of the Acceptable Offer, up to a maximum of one years rent.

For more information about Palos Verdes and South Bay Real Estate and buying and selling a home on the Palos Verdes Peninsula, visit my website at http://www.maureenmegowan.com . I try to make this the best real estate web blog in the South Bay Los Angeles and the Palos Verdes Peninsula. I would love to hear your comments or suggestions.

Comment balloon 4 commentsMaureen Megowan • December 11 2009 07:06PM
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