Eric T. Kirchenstein
As a commercial real estate and business law attorney, I have seen a variety of business models and strategies for leasing and purchasing commercial space. With a few exceptions, large companies often lease regardless of real estate market conditions, and many small businesses want to buy their own space. For many businesses, much like people, the choice to lease or buy property is contextual, often unsurprisingly due to perceptions of the state of the property market and the resulting psychology. It seems to be related to science.
Similar to how people react to the stock market, often with the mindset that companies need to ride the tide and buy as the market rises or avoid buying at the first sign of the market going sideways. As with most things in life, the answers are actually nuanced and depend more on the specifics of the situation than the ups and downs of the market. To keep the door open for purchasing corporate lease space, there are various options that can be drafted into commercial leases.
All business persons responsible for their own property appear to know or be aware of the basic terminology associated with commercial lease terms relating to the purchase of leased property, and virtually all Options” or “rights first denial. Unfortunately, not only are few people aware of the differences between these terms, but they are also aware of the wide variety of options that can be carefully drafted into a commercial lease, so companies You can purchase a leased property on terms that make sound business sense.
In fact, there are many ways to draft several stripes of purchase rights into a commercial lease. The three main valid methods are 1) “Option to Purchase”, 2) Right of First Refusal (“ROFR”), and 3) Right of First Refusal (“ROFO”). As mentioned, these are the basics, and there are many different ways to describe each of these three, but for the purposes of this article, we’ll stick to the basics.
Generally, purchase options are narrowly written to give tenants the opportunity to purchase the property after a certain date. As with all leasing terms, and this clause in particular, purchase option clauses should be as detailed as possible. We often see purchase option clauses that do not contain enough specificity to achieve what either the commercial tenant or commercial landlord is trying to achieve. Simply stating that there is a purchase option on a specific date is not enough. The other he must include a notification clause, including timing, as well as two clauses. Additionally, and perhaps most importantly, great care should be taken when describing how the values are determined. Unless the commercial landlord wishes to set the price unilaterally when the purchase option arises, the price must be agreed upon and the clause ensures that the purchase price is fair to both parties. should include a method.
Although often mistakenly used interchangeably, ROFR and ROFO are usually simpler. That said, details are very important in both clauses and should also be drafted carefully and reviewed with the help of an attorney. An ROFR is generally triggered when a commercial landlord receives an offer to purchase property and entitles the owner of the ROFR (commercial tenant) to purchase the property on the same or other terms as the offer. ROFR. ROFO is a lesser known term, but is often misused to mean ROFR. ROFO is triggered when a commercial landlord decides to sell a property and gives the owner (commercial tenant) the right to make an initial offer. As with purchase options, ROFO must be provided with sufficient detail to determine the purchase price.
All three provisions, whether they are purchase options, preemptive rights, preemptive rights, or modified hybrids of any of the three, are created with the company’s specific long-term goals in mind. can and must be created. A commercial landlord’s compliance with the terms of a company buying a commercial property can be out of control, but your company’s position in responding to landlords is often more malleable than it is perceived. With care and consideration, the terms of purchasing a leased property can often be much more acceptable to both commercial tenants and commercial landlords than they are often realized.
Take your time, roll up your sleeves, consult a commercial real estate attorney, and delve into the details of your commercial lease purchase terms and conditions, as well as all the terms a commercial lease typically entails. In commercial leasing, the devil really is in the details, and knowing the details now can set your business in a better position down the road.
Eric T. Kirchenstein