Commercial leases can be a minefield, both for property owners (or managers) and tenants. Mistakes and misunderstandings can cost a lot of money. That’s one reason it’s wise for both sides to have experienced legal guidance before they put their signature on any lease agreement.
Unnecessary mistakes on one or more terms of a lease can haunt a commercial property owner for years. One of the more common – and avoidable – mistakes is not understanding the difference between right of first offer (ROFO) and right of first refusal (ROFR).
Too often, these terms are used interchangeably or incorrectly. Let’s take a brief look at what each of them means and why the differences are significant.
Right of first offer (ROFO)
With an ROFO, the property owner has to give the tenant the option of leasing a specific space that is becoming vacant before the owner advertises it or offers it to another party. The tenant will then have a specified amount of time to accept the offer (typically five days).
This can help tenants who want to expand to a larger space or lease a second space get a chance to do so as soon as one opens up. There should be some details about how they transition their current lease to the new space.
Right of first refusal (ROFR)
With an ROFR, the property owner only has to notify the tenant if they receive an offer on a particular space that’s becoming available before they accept that offer. They don’t have to offer it to them first. The tenant then has a designated period, like ten days, to accept that offer if they choose to.
It’s important for both parties to understand which of the two terms they’re including in the lease. It’s especially crucial for the property owner to be clear what obligation they owe a tenant if another space they are interested in becomes available.
The consequences of confusing the two can be costly
If a tenant loses out on a space because the property owner used ROFR instead of ROFO, they can potentially sue them for the financial harm that resulted from what would be considered a breach of contract. A property owner could suffer reputational harm themselves if they get the reputation of not abiding by their lease agreements.
This is just one reason why commercial property owners can always benefit from having experienced legal guidance when writing, negotiating and enforcing their lease agreements.