Leave 'First Right of Refusal' out of Commercial Lease?

Question

Im negotiating a commercial lease with a hospital and they are wanting to include a clause giving them the first right of refusal anytime during their either 5 or 10 year term (to be negotiated as well).

Because they are a slow-moving bureaucratic system I am of the mind to leave this clause entirely off the lease. It seems like it could be a headache down the road and will delay the signing of the lease if any additional pertaining terms need be assigned. Also, don't lessees usually pay a one-time administrative fee of sorts to have the first right of refusal?

Id love any input-

Is there any benefit to me having the first right of refusal clause in the lease? (I do want to sell this property to them eventually in an ideal world)

Should I charge a fee? How much, etc?

Super appreciate any feedback!!

thanks,

Jennie

Matthew Mazur · Answer

@Jennie Kesselman Please share more details about the deal. Are you negotiation on an LOI or are you already in leases? Single or multi tenant building, term, who is paying for Tenant Improvements and how much, size of the space? A right of first refusal (“ROFR”) to renew or expand the Premises is not a ‘given’ and is stronger than an right of first offer (“ROFO”), which is more common.

Typically these take effect at the end of the initial term and option period, when applicable and you give the tenant a time window, ie, no sooner than 9 months no later than 6 months / or if it’s an option to expand, then, when available. No, don’t charge a fee (unless this is a ROFR to purchase, then maybe), but counter with a ROFO at the then fair market value (“FMV”). Usually an LL will give this if the tenant is making a substantial investment in the space, or they have excellent credit (I am assuming the hospital does in this case), and they are the largest or only tenant in the subject property.

Feel free to send me a direct message.

Courtney Duong · Answer

@Matthew Mazur we are in negotiation with a guy who already operates a Cricket store. He now wants to lease a unit at our retail strip (multi-tenant) as a second store but he is very slow in term of everything. So after he and our PM got to a good basic terms verbally we sent him a lease proposal. My question is: will this lease proposal be serving the same purpose as a LOI? And we can send it off to our attorney to start drafting the lease (that is, if and after he signs the lease proposal)? Or we really have to ask him to send us a LOI and go with LOI only? And how are we going to check their credit?

Thanks.

Joel Owens · Answer

Not really for the hospital but value of the lease is usually tied to a main component of how long the primary goes for.

So 5 years is not that good. If anything try to push for between 10 to 15 years. Then if you eventually bring to market could only help to make hospital pay more with competing offers.

If the lease is structured  in their favor instead then when you go to sell they have leverage to turn off other buyers from wanting the condo unit.

Sometimes you do want a short term lease when you can replace with a longer tenant to cap rate compress. It's all situational. No legal advice given.

You might benefit from a local commercial attorney to the property that routinely negotiates medical leases.

Jennie Kesselman · Answer

@Matthew Mazur Aha, I love it!! Will do!

Matthew Mazur · Answer

@Jennie Kesselman Great, tell them if they want 'control', they can sign a longer term now! Let us know the outcome.

Jennie Kesselman · Answer

@Matthew Mazur thank you Matt. Like you are saying, I really should consider more time for an option or even to just to renew the lease. I can only imagine the stress that will save me down the road so thanks for that tip !

Jennie Kesselman · Answer

I really appreciate the feedback and it was so helpful! Im going to heed the advice and my gut instinct on this one, which is to not include the ROFR on this lease for simplicity’s sake.

Matthew Mazur · Answer

@Jennie Kesselman If you are going to give a ROFO, I think it needs to be somewhere within a 12-6 month window so that you realistically have time to market the Premises and find another Tenant - 120 days seems like too tight. Since the space you are leases is on Hospital grounds, I think they will make a deal without an option. @Greg Dickerson is right, there is no advantage to give an option, unless you have to because of market circumstances - I have seen plenty of tenants walk away from deals when they cannot get an option. Given the circumstances that this project is on Hospital grounds, it seems like the LL side has a good amount of leverage.

Greg Dickerson · Answer

There is no advantage to you in offering a first ROFO to tenant. That would only benefit them. I typically do not bind myself to any future options like this as they can get messy.

Courtney Duong · Answer

@Matthew Mazur thanks for the response and tips.  I really like AIR CRE.  Really appreciate your help.

Leave 'First Right of Refusal' out of Commercial Lease?

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