Leases: First Right of Refusal
This article sets out some of the situations where a first right of refusal should be considered by both parties.
What is it?
A first right of refusal is used to describe an option given to the tenant to purchase the freehold in priority to anyone else.
The option can be drafted in several different ways, like pre-emptive rights for shares. For example, the clause may say that if the landlord wishes to sell the property, they must first offer the property to the tenant. If the tenant does not accept the offer, the landlord is then free to sell to a third party, provided that the sale is on no less favourable terms than offered to the tenant. An alternative clause could be along the lines that the tenant has the option to purchase at a price to be determined by a registered valuer.
Ownership of the property gives a business owner the benefit of security of tenure. It also allows the tenant control over rent increases and other matters that affect the tenancy.
A tenant may also be mindful of the freehold being taken over by a competitor. A competitor as a landlord could be an uncomfortable situation.
Additionally, a guarantor of a lease may wish to have the option to buy as it would be helpful for the guarantor to put themselves in the position of the owner to head off default action where the tenant falls into default.
Some tenants wish to purchase the property that they lease but may not be in a position to make that commitment at the time of moving to the premises. The first right of refusal is a way of giving the tenant some comfort in knowing that there will be an opportunity to realise their ownership dream.
The standard position for a landlord is to resist the addition of a first right of refusal. The issue for the landlord is that it gives the tenants additional rights while offering the landlord nothing in return. Worse than that, a first right of refusal can make a sale of the property more difficult.
Sometimes, a landlord is faced with the choice of granting a first right of refusal or the tenant finding alternate premises to rent/buy, so the landlord needs to consider whether it should be a deal-breaker.
Both prospective landlords and tenants need to check the lease documents carefully for the addition of any special clauses, including a first right of refusal. If a lease is being negotiated, awareness of clauses that could be added and their implications are important.