Right of First Refusal

Although they can be numerous in iterations, a ROFR (pronounced Rōfer) is a contractual clause that enables a third party to step in and purchase and/or lease a property based on what was negotiated between the Owner and a potential buyer/lessee.

As an example, let’s say a tenant leases a building and, in that lease, there is a ROFR clause to purchase the property if the owner decides to sell. In a more traditional ROFR scenario, if the Owner puts the building up for sale and negotiates with a potential buyer, upon coming to an agreement, the Owner would be legally obligated to take the negotiated terms and price to the tenant and offer the tenant the opportunity to step in and purchase the property first.

Putting ‘Right of First Refusal’ in Context

Summit Equity Partners, a real estate investment firm specializing in core-plus acquisitions, is considering the purchase of Evergreen Marketplace, a neighborhood shopping center located in suburban Denver, Colorado. The 75,000 square foot center features a mix of local and national tenants, including a grocery anchor, boutique retailers, and several quick-service restaurants. The center generates an annual net operating income (NOI) of $1.25 million and is listed for sale at $18.5 million, reflecting a 6.75% cap rate.

One of the tenants in Evergreen Marketplace, a regional grocery chain, holds a Right of First Refusal (ROFR) clause in their lease agreement. The ROFR allows the grocery tenant to purchase the property under the same terms that Summit Equity Partners negotiates with the current owner. This clause was included when the lease was signed five years ago as an incentive for the grocery chain to anchor the center.

Summit Equity Partners negotiates a purchase agreement with the seller at the full asking price of $18.5 million. Upon finalizing the terms, the seller is legally required to notify the grocery chain and offer them the opportunity to purchase the property on identical terms. The grocery chain has 30 days to decide whether to exercise their ROFR.

If the grocery chain chooses to exercise their ROFR, they would replace Summit Equity Partners as the buyer, purchasing the property for $18.5 million. If the grocery chain declines, Summit Equity Partners can move forward with the acquisition. This situation demonstrates the potential complexity and risk that a ROFR clause can introduce for prospective buyers, as the ultimate decision rests with the holder of the ROFR.

In this hypothetical scenario, Summit Equity Partners performs due diligence with awareness of the ROFR and structures their negotiation timeline to accommodate the possibility that the grocery chain may exercise their rights.