Right of first offer

If your landlord decides to sell the property where you’ve been running your business for the past ten years, it can be tough to have to move your business suddenly. However, as a tenant, you have rights that can help you secure your current location, which is vital for businesses that depend on customer traffic and brand presence in a specific area.

The right of first offer is a protective measure for tenants that allows them to protect their investment in the lease and maintain stability in their business operations.

In this article, we will examine the basic details of ROFO and how it protects tenants by allowing them to secure their leasehold investment and maintain stability in their business operations.

What is the Right of First Order (ROFO)?

A right of first offer is a contract that permits the holder to buy the asset from the owner before they try to sell it to a third party. If the holder is not interested in the asset anymore, then the owner can sell it to someone else. The right to first offer is commonly used in the real estate industry. It is written as a contract like a business partnership or a lease and is triggered when the proprietor wants to sell the asset.

For example, Tom is one of the major shareholders in Vista Inc. with 8 million shares. Bella, a shareholder in the company has the right to first offer. Tom decides to sell 2 million shares, so he has to make an offer to Bella before he can offer the shares to a third-party. Tom is obligated to negotiate in good faith and try to reach an agreement with Bella before starting negotiations with a third-party. If Bella does not buy the 2 million equity, then Tom has the right to sell them to a third-party. However, the terms and conditions will be similar to what he offered Bella, it should not be more favorable than them.

How ROFOs Work?

The contract terms state that the owner has to give the first offer to the holder of the right of first offer. The holder then has a specific period before which he has to make an offer. If the time limit expires, so does the right, and the owner is free to sell it to a third party. If the owner does not like the offer, he is free to decide if or not to reject it and sell the asset to anyone else without any restraints.

In any case, where the owner is unable to sell the asset to a third party, they can approach the right holder for a new offer. The right holder is not bound by the initial offer anymore and can choose to lower it since he knows that the owner was unsuccessful in selling it. This gives the holder a more powerful position in the negotiations.

Advantages and Disadvantages Of Right of First Offer

The main advantages of a ROFO are:

• It gives the right holder the first opportunity to purchase the asset.
• The owner can eventually sell to a third party if the ROFO holder declines.

Some disadvantages include the following:

• It can complicate and delay the sale process.
• The owner may not be able to achieve the highest possible sale price if restricted to the ROFO offer terms.
• Potential buyers may be reluctant to negotiate seriously if they know a ROFO exists.

How the Right of First Offer Protects Tenants Interest?

A right of first offer is a protective measure for tenants, enabling them to secure their leasehold investment and maintain stability in their business operations.

• First opportunity to purchase – When a landlord decides to sell the property, the ROFO ensures the tenant has the first chance to make an offer.
• Control over future tenancy – The ROFO mitigates the risk by allowing the tenant to purchase the property directly, thus ensuring the continuity of their business operations.
• Negotiation leverage – The ROFO can negotiate price, payment terms and other conditions that might not be available if they were competing with multiple buyers.
• Cost saving benefits – By purchasing the property directly from the landlord,tenants can significantly reduce transaction costs, providing a financial safety net.
• Protection against market fluctuations – If property values increase,tenants may secure a purchase price that is more favorable on the open market.
• Transparency and communication – It encourages discussions about the future of the property and the tenant’s intentions and better understanding of each party’s need.

Disputes highlight the importance of clearly defined terms and open communication between landlords and tenants regarding the right of first offer, as well as the necessity for both parties to understand their rights and obligations under the agreement.

Secure Your Stake Before Sale!

Right of first offer can benefit both parties. The right holder gains a strategic advantage by having the first opportunity to acquire an asset, while the owner can streamline the sales process by dealing with a familiar party.

However, the terms of the ROFO, including time frames and pricing conditions, are crucial in determining its effectiveness and fairness for both sides. It is a wise decision to consult with a professional to ensure a smooth and equitable process for both the owner and ROFO holder. Contact us now to know more about.