A right of the first offer, known by the acronym “ROFO,” is a right granted to tenants that allows them to enter into a transaction before it’s marketed and offered to other potential buyers or tenants. The right provides the tenant with the first opportunity to lease or purchase the property at agreed-upon terms, detailed in the underlying agreement if the landlord decides to sell or rent it during the agreement term.
This right differs from a right of first refusal because it is the right for the tenant to offer on the particular space before it is marketed or provided to others. In contrast, a right of first refusal is the right to have the first look and opportunity to take the space at post-negotiated terms with a third party prospect.
What are the Pros & Cons For Tenants and Buyers?
The primary benefit of an ROFO is that it gives the tenant the exclusive right to take the space before a landlord markets it to others. This right is particularly helpful when space is not available but may become available in the future. You will often see this type of right in tight markets and with coveted buildings.
The right also typically outlines the right’s terms and conditions, including duration, price, rents, and other relevant provisions such as notice periods.
Tenant/Buyer Pros:
Security & Stability: A ROFO may provide tenants or buyers with a sense of security, knowing they have the first opportunity to continue occupying the premises or acquire the property if it sells.
Control Over Future Space: Tenants and Buyers can strategically plan their operations knowing that they will be the first in line to take space if it becomes available on pre-determined conditions and prices. The right is particularly helpful for sites or spaces that are difficult to acquire.
Tenant/Buyer Cons:
Potential For Disagreement: If the tenant decides not to exercise the right, there could be disagreements regarding the value or terms of the property, leading to strained landlord-tenant relations.
Limited Flexibility: The right only becomes available when the landlord or owner decides to market the space. It also is based on pre-determined terms, which may or may not be in the tenant or buyer’s favor if market conditions have changed.
What are the Pros & Cons For Landlords?
Landlords may like a right-of-first offer because it can be relatively low risk for them. They still maintain some semblance of control over when the property is marketed to the prospect. It also lines up a qualified buyer or tenant at pre-determined terms and conditions, increasing the likelihood of quickly leasing or selling space.
Landlord/Owner Pros:
Pre-Qualified Prospect: The tenant or right holder is usually a qualified prospect with the landlord so there is a lower due-diligence threshold of the tenant or right holder exercises the right.
Control Over Timing: A landlord can control when they re-market the space or building to the right holder.
Possible Lower Marketing Cost: Landlords can maintain control over the sale process by offering the property to an existing tenant first, potentially avoiding the costs and uncertainties associated with marketing the property to external buyers or tenants.
Landlord/Owner Cons:
Limited Market Exposure: By granting a tenant an ROFO, landlords may miss out on better offers from other potential buyers or tenants in the market at more lucrative terms.
Potential for Delay: If the tenant decides to exercise their offer, the process could delay the sale or lease of the property to other interested parties, potentially affecting the landlord’s timeline or financial plans.
