Right of First Refusal – FYI

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Recently an old friend and client called me to inquire about a problem he encountered in regard to a real estate property he’s been leasing for his retail business for quite sometime already.

This particular location is one of his best located branches ! The issue was that the property w as recently sold. Sold without notice given to him at all !

I then asked him if he has a contract of lease and if it specified in that Lease Contract that he, as the current tenant has the “Right of First Refusal” to buy the property if the property ever comes up for sale.

For those that may be unclear about it’s meaning, below is the definition :

RIGHT OF FIRST REFUSAL (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a Third party. In brief, the right of first refusal is similar in concept to a Call Option.

An ROFR can cover almost any sort of asset, including real estate, personal property, a patent license, a screenplay, or an interest in a business. It might also cover business transactions that are not strictly assets, such as the right to enter a joint venture or distribution arrangement. In entertainment, a right of first refusal on a concept or a screenplay would give the holder the right to make that movie first. Only if the holder turns it down may the owner then shop it around to other parties.

Because an ROFR is a contract right, the holder’s remedies for breach are typically limited to recovery of damages. In other words, if the owner sells the asset to a third party without offering the holder the opportunity to purchase it first, the holder can then sue the owner for damages but may have a difficult time obtaining a court order to stop or reverse the sale. However, in some cases the option becomes a property right that may be used to invalidate an improper sale.

An ROFR differs from a Right of First Offer (ROFO, also known as a Right of First Negotiation) in that the ROFO merely obliges the owner to undergo exclusive good faith negotiations with the rights holder before negotiating with other parties. A ROFR is an option to enter a transaction on exact or approximate transaction terms. A ROFO is merely an agreement to negotiate.

Now going back to the situation at hand, I then referred my client / friend to one of our network lawyers. Upon initial review of existing documents, the Lease Contract has expired six months ago and there was no new Lease Contract renewed but Lease rentals are paid and post dated checks were issued for the full year.

The sale was just done recently and the documents are currently with the Bureau of Internal Revenue for review pending release of the Certificate Authorizing Registration.

My client / friend has a strong case according to our lawyer and action has already been done to remedy the situation. ( I will continue with the outcome of this case as it progresses )

Just a friendly reminder to always have contract (regardless of whoever it might be ), to understand in detail what the contract states, have the contract reviewed by a knowledgeable lawyer who specializes in the field, be prepared for the unexpected, and most importantly, have the contract NOTARIZED !

Have a great day despite the weather !

robert