Option to Purchase and and Right of First Refusal

The Failure to Document and Perfect – Tenant Beware

One of the most common mistakes that Tenant’s make in commercial leases is the failure to properly document and perfect a right they might have to purchase the leased space. Generally, these rights are either found in the form of an option to purchase, or a right of first refusal. Normally, an option to purchase will give a tenant the absolute right to purchase the leased premises, on or before a specified date, and at a certain price (or a price that can be ascertained with certainty). A right of first refusal, on the other hand, does not give the tenant an absolute right, but most often expresses that the tenant has the right to purchase the leased premises from the landlord prior to the landlord moving forward with a sale to a third party.

For the sake of cost and expediency, many commercial leases are created and executed without the aid of legal counsel. With the increase of free legal forms available from so many Internet sources, leases are often found and used without regard for the specifics of applicable state law. These facts, and the desire and need for the quick and cheap, often lead to less than what is commercially prudent as to formality. This has the potential of causing huge problems in the case of tenant options to purchase and rights of first refusal. In many instances, short term leases contain these options and rights with some expectation that the leased premises is on a short course for sale to the tenant. As a result, leases are in many instances executed without acknowledgement, and without thought of putting the purchase right on public record. Though many leases contain provisions that allow for the recording of a memorandum of lease to document the property rights of the parties, most leases are executed without any recording in the public records actually ever being made.

Unquestionably, a properly documented option to purchase or right of first refusal in a lease can create a legally binding contract between the landlord and tenant with respect to purchase rights described. However, when real property rights are concerned, the public records and the rights of third parties will always need to be considered. The failure to draft carefully worded legal documents that put all otehrs on notice of the rights under these types of options and rights may end with a trusting tenant losing its rights to an innocent third party purchaser.

Commercial tenants are well advised to understand that it is imperative that they both properly document (writing in proper recordable form) and perfect (by recording in the county register of deeds office) options to purchase and rights of first refusal. Without any intent to disparage commercial landlords (many of whom are my clients), I think it is important that the commercial tenant not rely upon the landlord to offer, or be responsible for, documentation and perfection of this right.


Tom Grella