[Commercial Lease] Right of First Refusal (ROFR) & Right of First Offer (ROFO) :
In the world of renting big buildings for businesses, there are special rules called Right of First Refusal (ROFR) and Right of First Offer (ROFO). These rules are like getting a head start or first pick when it comes to renting or buying more space.
But they
are not very common in most commercial lease agreements.
Let’s break down what these rules are and how often they show up.
What Are ROFR and ROFO?
Right of First Refusal (ROFR)
ROFR is like this: If someone else wants to rent or buy the space, the person renting it now gets to decide if they want to match the offer first. Here’s how it works:
When It Happens: It only kicks in when the landlord gets an offer from someone else.
What the Landlord Does: The landlord has to show the offer to the current renter.
What the Renter Does: The renter gets a short time to say, “Yes, I’ll match that!” or “No, thanks.”
If the Renter Says No: Then the landlord can go ahead and accept the other person’s offer.
Right of First Offer (ROFO)
ROFO works a little differently. It’s like getting to raise your hand first when there’s a chance to rent or buy. Here’s how it goes:
When It Happens: The landlord lets the renter know when a space is available.
What the Renter Can Do: The renter gets to make an offer first.
If It Doesn’t Work Out: If they can’t agree, the landlord can look for other people, but they usually can’t offer better terms than what they talked about with the renter first.
How Often Do These Rules Show Up?
For businesses renting space, ROFR and ROFO aren’t very common. Here’s how often they’re included:
Stores and Shops:
68% of agreements don’t have either rule.
22% include ROFR.
10% include ROFO.
Office Buildings:
71% of agreements don’t have either rule.
20% include ROFO (especially in New York City).
8% include ROFR.
<data source : www.lexisnexis.com>
How Are ROFR and ROFO Different?
When They Happen:
ROFO happens before the space is offered to others.
ROFR happens after someone else makes an offer.
How Offers Are Made:
In ROFO, the renter and landlord talk directly.
In ROFR, the renter decides based on another person’s offer.
Who Sees the Space:
ROFO keeps the space out of the market at first.
ROFR lets everyone see it before the renter gets a chance.
Landlord’s Choices:
ROFO gives landlords more options because there’s no outside offer yet.
Why Do These Rules Matter?
For Renters:
These rules are helpful because they can:
Help Expand: Let the renter grow into more space when needed.
Stop Competition: Keep competitors from taking nearby space.
Stay Secure: Make sure they can stay in a good location.
For Landlords:
Even though these rules might limit choices, they can:
Build Trust: Keep renters happy.
Make Leases Longer: Encourage renters to stay longer.
Wrapping It Up
ROFR and ROFO aren’t something you’ll see in most business rental agreements, but they can be really helpful when they’re included. Renters get chances to grow or keep great spaces, and landlords get happier, long-term renters.
JIGO is now running a 'by-invitation only' Beta program for JIGO Commercial Leases (CL). You can request access here.