Tenant Purchase Options in Commercial Leases
What are the differences between the option to purchase, ROFR, and ROFO clauses?
There are three approaches to giving a tenant rights to purchase property: an option to purchase, a right of first refusal, and a right of first offer.
An option to purchase is a fixed right, where a tenant may purchase property even if (1) the landlord does not want to sell, (2) there is another third party offer(s), and (3) the landlord does want to sell, but cannot due to the tenant’s option. This provision may be in a separate document and still be applicable. The option provision can last for the entirety of the term or less than.
The right of first refusal is a right of the tenant that allows the tenant to match the offer of a third party to purchase the property. This can be within the lease or another document. In this case, the power to dictate who can buy the property lies in the hands of the landlord. If a third party offer is made, the tenant may match the price. This process may run for the entire duration of the lease’s term.
The right of first offer is a tenant’s right to make an offer before the landlord offers the property to a third party. This right allows the tenant to become involved in the purchasing process before a third party.
Why should a tenant purchase rights?
A tenant would consider purchase rights to protect good will, to protect access, to control costs, and to control the process. Tenants would want to protect good will because of the location's clientele and familiarity of the property’s location. Purchase rights can also aid the protection of access as many tenants are location dependent as they may require access to transportation hubs, warehouses, logistics companies, etc. A tenant would want to control costs to protect their investments into the property. Further, controlling the process of purchase allows the tenant to control its location through ownership without immediate capital requirement.
What do landlords generally oppose granting purchase rights?
A landlord resists purchasing rights due to loss of control of the process, and interference with available mortgage debt. If a landlord grants the tenant the option to purchase, then the tenant may for a sale at a time convenient to the tenant, but not the landlord. Further, a landlord may discover that allowing the option to purchase, may cause the value of the property to have a negative impact by a bank appraiser, and thus lowering available mortgage debt. Additionally, landlords may oppose granting these rights to avoid litigation.
What are the key provisions in an option to purchase?
Key provisions in an option to purchase are lease clause/separate document, exercise of option, option payment, purchase price, and purchase and sale agreement. A lease clause/separate document provision determines how the option will be documented on a lease clause or a separate document. The exercise of the option will disclose when the option becomes available to the tenant. The option payment is a provision that requires the tenant to pay for the option exclusive of rent and security deposit. The purchase price is a term that refers to the option to purchase remaining in place for an extended period. Thus, the price must be set at the time of the signage of the lease. Finally, purchase and sale agreement is a provision dictating that the option should be signed and become effective at the time the option is granted.
What are the key provisions in a right of first refusal?
Key provisions of the right of first refusal are the term of a ROFR, the trigger of a ROFR, the tenant’s response, and the effect on the lease. The term of an ROFR is generally the full term of the lease with the addition of extension periods. The trigger of the ROFR is when the landlord accepts a third party offer for the property. The tenant’ response must occur within an agreed period of time and advise the decision to the landlord, offer or unintention of placing an offer. Further, if the tenant does not wish to exercise the ROFR, then there should not be any change to the tenant’s lease.
What are the key provisions in a right of first offer?
The key provisions of the right of first offer are the term of ROFO, trigger of ROFO, tenant’s response, effect on the lease, and other terms. The term of the ROFO is the length of the lease with extension periods. The trigger is when the landlord notifies the tenant of the property as “available for sale”. The tenant’s response should be provided within a reasonable time, usually 30 days. In the case that the tenant does not desire to exercise the ROFO, then the lease should not change. Other terms to this is that the landlord may specify the term where the advertises the property for sale.