Recent Development 2015-3 Right of First Refusal
Be Careful About What You Are Giving
Owners often grant a Tenant a right of first refusal to purchase the property they are leasing.
One of the main concerns from the Owner’s standpoint when giving a right of first refusal is whether the offer which the party has to match is “complete”? Does the Owner have to have a fully negotiated Agreement of Sale and Purchase (and legally binding) before submitting the offer to the Tenant, i.e. party granted the right of first refusal? Will a Letter of Intent which has a price, but is subject to due diligence, conditions of financing, and negotiating terms of a definitive purchase agreement, be sufficient to trigger the right of first refusal.
Tenants and other persons who are granted a right of first refusal will often take the position that an “offer” is not definitive enough (to require a matching offer) until there is a fully negotiated Agreement of Sale and Purchase which the parties are ready to sign. As a practical matter, it is a rare instance where a prospective Buyer, or Tenant will be willing to negotiate an Agreement of Sale and Purchase where there is a buyer holding an option or right of first refusal. Negotiations of a definitive purchase agreement and due diligence are generally time consuming and expensive and if a Buyer knows that there is a potential buyer or Tenant holding a right of first refusal, then they will often not want to spend the time or the money to negotiate an Agreement of Sale and Purchase unless the Seller can be freed to sell the property.
Taking the above issues into account, it is certainly advisable that the right of first refusal should include, at a minimum, a provision indicating that a fully negotiated Agreement of Sale and Purchase is not required to trigger the right of first refusal, and that a Letter of Intent, with a purchase price, but subject to other terms and conditions, would be sufficient to trigger the right of first refusal. Further, because a prospective Buyer, will not want to wait around to have the recipient of the right of first refusal make up its mind as to whether it wants to exercise its right of first refusal, a comparatively short period e.g., ten (10) days, should be a requirement to trigger the right of first refusal.
If the Letter of Intent provides that the purchase is subject to financing, is that sufficient for a purchaser to match the offer? Should the right of first refusal allow the potential buyer to condition its offer or its ability to finance the purchase? How long should the financing contingency be for? Should the closing date be defined?
Disputes are prevalent as to when an offer is definitive enough to “trigger” the right of first refusal.
If you have any questions about this Recent Development, please feel free to call Milton Cross, Esquire, at 215-241-8811.