Franchisee Real Estate Lease: RIGHT OF FIRST REFUSAL

A right of first refusal (ROFR) is a contractual provision in a commercial lease that gives the franchisee (tenant) the first opportunity to either purchase the property or lease an adjacent space before the landlord can offer it to a third party.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The complexity of the lease agreement for the commercial real estate that is used in the franchise operation can very easily equal, or even surpass, that of the franchise disclosure document and the franchise agreement, such that retaining the legal services of an experienced lawyer to decipher, explain and negotiate the commercial lease agreement and its schedules. And for over 25 years, we have been working with business owners, including franchisees, to understand and deal with commercial lease agreements that have been presented by landlords and are foundational to their business operations. To gain the most from our legal analysis and advice as to the commercial leasing arrangement, a franchisee would be well served to understand some of the most significant commercial leasing terminology, which we have undertaken to provide you with in-depth analysis.

A right of first refusal (ROFR) is a contractual provision in a commercial lease that gives the franchisee (tenant) the first opportunity to either purchase the property or lease an adjacent space before the landlord can offer it to a third party. This clause is a valuable negotiating tool for a franchisee (tenant), as it provides them with a degree of control over their future in the building. It is not an option to purchase; rather, it is a right that is "triggered" only when a specific event occurs, such as the landlord receiving a bona fide offer from a third party.

Two Common Types of Right of First Refusal

• ROFR to Purchase: This is the most common and valuable type for a tenant. It gives the tenant the right to purchase the entire property (or the portion they occupy) on the same terms and conditions as an offer the landlord has received from a third-party buyer.

  • How it works: If the landlord receives a bona fide offer to sell the building, they must first present that offer to the tenant. The tenant then has a pre-determined amount of time (e.g., 30 days) to decide whether to "match" the offer. If the tenant agrees to the terms and exercises their right, the landlord is obligated to sell to the tenant instead of the third party. If the tenant declines, the landlord is free to proceed with the sale to the original third party.

• ROFR to Lease Adjacent Space: This type of ROFR gives the tenant the first opportunity to lease an adjacent space in the building that becomes available.

  • How it works: If a neighboring tenant's lease expires and the landlord receives a new offer for that space, they must first present the offer to the existing tenant with the ROFR. The tenant can then decide to expand their business into the new space by matching the terms of the third-party offer.

Key Elements of a Well-Drafted ROFR Clause

To be effective, an ROFR clause must be very clear and specific. Ambiguity can lead to costly legal disputes. Key elements include:

• Triggering Event: What exactly triggers the ROFR? Is it any offer, or only a "bona fide" offer? Does it apply to a sale of the entire building or just the leased premises?

• Notice: The landlord's obligation to provide written notice to the tenant is critical. The clause should specify how and when this notice must be given.

• Timing: The tenant must be given a clear, reasonable timeframe to exercise their right. This is usually measured in business days (e.g., 15-30 days) from the date they receive the landlord's notice.

• Terms and Conditions: The ROFR must require the tenant to match all material terms of the third-party offer, not just the price. This includes things like closing timelines, deposit amounts, and any conditions on the sale.

• Carve-outs: The clause will often include exceptions, such as a sale to a family member, a transfer between related corporate entities, or a transaction that is part of a larger portfolio sale.

• Termination: The clause should specify when the ROFR expires. Does it last for the entire lease term, including any renewals, or is it a one-time offer?

Right of First Refusal vs. Right of First Offer

It's important to distinguish an ROFR from a Right of First Offer (ROFO).

• ROFR (Right of First Refusal): The landlord receives an offer from a third party first, and the tenant has the right to "refuse" that offer (by not matching it) or "refuse" the landlord's right to accept it (by matching it).

• ROFO (Right of First Offer): The landlord must first offer the property to the tenant, at a price and on terms determined by the landlord. The tenant can accept or reject this offer. Only if the tenant rejects the offer can the landlord then market the property to third parties, and usually, the landlord cannot accept an offer from a third party that is on terms that are more favourable to the third party than what was offered to the tenant.

For a tenant, an ROFR is generally more valuable than a ROFO because it gives them the ability to react to a real, market-tested offer, rather than having to respond to a potentially inflated price set by the landlord.

Naturally, how the concept operates in the specific context of the particular lease agreement requires experienced legal analysis, such that you make the most out of your understanding of the commercial lease agreement for your franchise. For such legal analysis and advice for your franchise and its commercial leasing arrangements, we welcome you to contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com to schedule a confidential consultation.

Franchisee Real Estate Leasing Basics - Many franchise arrangements require that business operations are undertaken from commercially leased real estate, where it is next to impossible to purchase acceptable real estate at which the franchised business is to be undertaken. As such, it is imperative that your commercial leasing arrangements are correctly undertaken and don't financially hurt your business' profitability, with an understanding of the basics of commercial leasing of real estate being important. Read more.

 

Franchisee Real Estate Lease: Build and Build-out - Although there are a multiplicity of factors at play when a franchisee is looking to commence their particular franchise operation, two of the more consequential aspects that the franchisee (lessor) needs to be aware of are the build (construction of the building) and the build-out (internal work on the leased premises). Read more.

 

Franchisor as Tenant (with Franchisee subleasing) - Whereas the typical leasing arrangement is for the franchisee to lease the subject property from the property owner (landlord); on occasion, the franchisor will lease the property from the property owner and thereafter proceed to sublease that same property to the franchisee. As opposed to the franchisee leasing directly from the property owner, having the franchisor enter into the lease with the property owner can be advantageous to the franchisee. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.