Right of First Refusal (ROFR)

A Right of First Refusal (ROFR) is a contractual right, often found in commercial leases, that gives a specific party the option to enter into a transaction with the owner before the owner can enter into that transaction with a third party. In the context of commercial real estate, this most commonly applies to the sale of the leased property or an adjacent parcel, or to the re-leasing of the tenant's current space or an expansion space. If the owner receives an offer from a third party, they must first offer the same terms and conditions to the holder of the ROFR, who then has a specified period to accept or decline.

For a commercial real estate broker, understanding a tenant's ROFR is crucial during property sales or lease negotiations. If a property is being marketed for sale, and a tenant holds a ROFR on the building, the broker must advise the seller that any bona fide offer received will first need to be presented to the tenant. Similarly, when a tenant with a ROFR on an adjacent space expresses interest in expansion, the broker must ensure that the landlord honors this right before entertaining offers from new tenants. This knowledge allows brokers to manage expectations, structure deals appropriately, and avoid potential legal complications or delays in transactions.

From a lending and underwriting perspective, a ROFR can significantly impact property valuation, marketability, and exit strategies. A lender will want to understand the implications of any ROFRs on a property, particularly if they relate to a potential sale of the collateral. If a tenant has a ROFR on the entire property, it could limit the pool of potential buyers or affect the timeline for a sale, especially in a distressed scenario. Brokers and lenders must identify and analyze these clauses early in the due diligence process to assess potential risks, ensure clear title, and accurately evaluate the asset's long-term investment potential and liquidity.