Make Right of First Refusal a One-Time Right

May 31, 2003

To attract a desirable tenant, you may have to agree to give it a right of first refusal to lease or buy space in your building or center. But a right of first refusal can create obstacles to your renting or selling the space in the future. So you'll want to make the right available to the tenant only once. That is, you'll want the tenant to have a right to exercise its right of first refusal only for the first lease or purchase offer you get—not for any subsequent offers. That way, the right of first refusal won't come back to haunt you every time you try to rent or sell the space.

To attract a desirable tenant, you may have to agree to give it a right of first refusal to lease or buy space in your building or center. But a right of first refusal can create obstacles to your renting or selling the space in the future. So you'll want to make the right available to the tenant only once. That is, you'll want the tenant to have a right to exercise its right of first refusal only for the first lease or purchase offer you get—not for any subsequent offers. That way, the right of first refusal won't come back to haunt you every time you try to rent or sell the space.

But if your lease is like many we've seen, the language that you thought prevented the tenant from exercising its right of first refusal more than once may not be clear enough. And that can lead to disputes and legal trouble for you.

California Owner's Lease Is Ambiguous

For example, a California owner's lease gave the tenant a right of first refusal to buy a building. The lease said: “Tenant's rights under this Section…shall remain in effect only until such time as Tenant shall first have had the opportunity to accept Landlord's Offer under this Section…and if Tenant does not timely and properly accept Landlord's Offer at such first opportunity, then this Section…shall be of no further force and effect whatsoever.”

The owner got an offer from a prospective buyer and notified the tenant. The tenant opted not to exercise its right of first refusal to this offer. The owner ultimately called off the sale to the prospective buyer. The owner later sold the property to a new buyer, without notifying the tenant. And the tenant sued the owner, claiming that the owner didn't give it a chance to exercise its right of first refusal. The owner asked the court to dismiss the lawsuit, arguing that the right of first refusal was a one-time right that ended when the tenant passed on the first prospective buyer's offer.

A California appeals court refused to dismiss the lawsuit. The court said that the lease was ambiguous as to whether the tenant was to get an opportunity to buy the property only the first time there was a potential sale or once each time there was a potential sale. The court sent the case back to the lower court to determine what the parties intended the lease to mean [San Diego Watercrafts, Inc. v. Wells Fargo Bank, NA]. So the owner will have to waste more time and money and hope that the court eventually agrees that its interpretation of the lease is correct.

Clarify ‘One-Time’ Right in Lease

To plug this loophole and avoid a situation similar to the California owner's, make sure your lease clearly says that the tenant has only a one-time right of first refusal, says New York attorney Stuart A. Frank. It should also say that if the tenant fails to exercise its right of first refusal, it will lose that right forever, Frank explains. And it should say that the tenant can't assign its right of first refusal to anyone else without your prior consent (which you can withhold in your sole discretion), he adds.

To do this, add the following to your lease where it discusses the tenant's right of first refusal:

Model Lease Language

  • a. During the first [insert #, e.g., 6] months of this Lease, Tenant shall have a one-time right of first refusal to lease space located at [insert location of space].

  • b. It is understood and agreed by the parties hereto that Tenant's rights under Paragraph a hereof extend only to the first (1st) instance of exercise of this right. If Tenant fails to exercise its right of first refusal or fails to timely exercise such right, Tenant shall have forever lost its opportunity to do so and no further right of first refusal shall exist.

  • c. It is further understood that the right in Paragraph a hereof is special to named tenant herein, and shall not be assignable by Tenant without Landlord's prior written consent, which Landlord may withhold in its sole and absolute discretion.

CLLI Source

Stuart A. Frank, Esq.: Special Counsel, Hinman Howard & Kattell, LLP, 224 Harrison St., Syracuse, NY 13202; (315) 473-9414.

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