Right of First Refusal on Commercial Property

Conor Meyers — Co-Founder & Business AttorneyHas built and run businesses; advises owners on contracts, transactions, and risk. About Conor →

An option lets you buy. A right of first refusal lets you match somebody else who wants to.

Both rights give a party a claim on property they do not own, but they work differently and are worth different amounts. ROFR vs option to purchase is the distinction that matters: an option is exercisable at the holder’s initiative on agreed terms, while a right of first refusal only activates when the owner receives an offer it is prepared to accept.

We handle these matters for growth-stage companies in Idaho and California. This is general information — not legal or tax advice on a specific situation.

A vague right of first refusal is a lawsuit with a delay fuse.

How the right works

The owner markets the property normally. When it receives an offer it wants to accept, it must notify the holder, who then has a defined period to purchase on those terms. If the holder declines, the owner may proceed with the third party.

How a right of first refusal is triggered should be spelled out. Does a letter of intent trigger it, or only a signed contract? Does a transfer to an affiliate count? Does a sale of the entity that owns the property count? Silence on these produces exactly the disputes the right was meant to avoid.

Define the trigger, or you will argue about it later.

Drafting a ROFR clause

Drafting a ROFR clause requires attention to what must be matched. Price is obvious. Less obvious: closing timeline, financing contingencies, deposit, and any non-cash consideration.

Non-cash consideration is the classic problem. If a third party offers to exchange other property, a holder cannot literally match it, so the clause should provide a mechanism for valuing non-cash terms in cash.

Non-cash offers break a ROFR that never contemplated them.

Effect on marketability

ROFR effect on property marketability is real and usually underestimated by the owner granting it. Buyers are reluctant to spend on diligence and negotiation knowing another party can step in and take the deal at the end.

Some prospective buyers simply will not bid. Others discount to reflect the risk. An owner granting a right of first refusal should understand it may reduce both the pool and the price, which is part of what makes the right valuable to the holder.

The right costs the owner buyers, which is why it is worth having.

Tenant rights of first refusal

Tenant right of first refusal lease provisions are common where a business occupies space it may eventually want to own. The right typically lives in the lease and should be recorded, or at least memorialized, so it binds a purchaser.

An unrecorded right may not survive a sale to a buyer without notice. Where the tenant has invested substantially in the space, recording is the difference between an enforceable right and a claim against a former landlord.

An unrecorded right may not survive the sale it exists to control.

Timelines and practical mechanics

The notice period should be long enough for the holder to arrange financing but short enough not to derail the third-party sale. Fifteen to thirty days is common, and the clause should state what constitutes valid notice and how it is delivered.

Consequences of failing to respond should be explicit — usually the right lapses for that transaction. Whether it revives if that sale fails is a separate question the clause should answer rather than leave open.

Say what happens if the third-party sale falls through afterward.

When each right is appropriate

A right of first refusal suits a party that wants protection against losing the property without committing to buy. An option suits a party that has a definite plan and wants certainty of price and timing.

Owners generally prefer granting a right of first refusal, since it does not force a sale. Holders generally prefer an option, since it does not depend on a third party appearing. Recorded interests in Idaho follow Title 55, financing implications follow FDIC practice, and where an owner-occupier is weighing purchase the SBA 504 program is worth comparing.

Owners prefer refusal rights. Holders prefer options.

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Frequently asked questions