A Right of First Refusal (ROFR) is the right to match an offer to purchase a seller’s property. ROFRs can be found in different types of documents relating to both real and personal property. Often, they are contained in leases, giving the tenant a ROFR to purchase the leasehold property. They are also used in shareholder, partnership and operating agreements giving “partners” the ROFR to purchase each other’s interest in the entity.

ROFRs often have a chilling effect on a seller’s ability to sell property, particularly real estate. Potential buyers won’t put forth much time, effort or due diligence in looking at a property knowing that an offer could be matched and the property sold to the holder of the ROFR. If a property is very desirable, a potential buyer might have to overpay in order to discourage the ROFR holder from exercising.

Generally, ROFRs require that the holders close on the same terms as set forth in the offer. Therefore, if a seller receives an all cash, no-contingency deal, the holder would have to close without financing and with no contingencies. Sometimes this will also work to the potential buyer’s advantage. While the price might be attractive to the ROFR holder, the terms of the offer might make it difficult, if not impossible for the ROFR holder to close.

Usually, the event that triggers the ROFR is a “bona fide, 3rd party offer” duly accepted by the seller. What constitutes a bona fide 3rd party offer? The easy, legal answer is an offer made by an unrelated 3rd party purchaser who purchases the property for valuable consideration that is inducement for the entering into a contract without fraud or deception.

I recently had a tenant ask me to analyze a situation relating to a ROFR. The tenant had completed its 10 year initial lease term and the 1st year of its 5 year renewal term. There were 4 years remaining on the lease. The landlord had received an unsolicited offer to sell the building from an unrelated 3rd party. Though the landlord had not intended to sell, landlord was inclined to accept and forwarded the offer on to tenant with a note saying that landlord would pass on the offer if tenant would agree to purchase the property at the end of the lease term for a price that was $200,000 less than the current offer.

Needless to say, the tenant was confused. To make it more confusing, the offer was full of contingencies. The first major contingency was that the buyer had to get 3 adjacent properties under contract and then simultaneously close with this property. So, the contract was intended to be a property assemblage and this was the 1st of 4 parcels that the buyer had made an offer on. The other major contingency was re-zoning and site plan of the assembled property. However, the contract did not describe the intended use or the required approvals. My primary question was whether we even had a bona fide contract that triggered the ROFR.

The biggest problem was that tenant’s ROFR required that tenant respond in 15 days and close within 45 days thereafter. Given that the buyer’s contingencies had not yet been satisfied and that there was no possible way that they could be satisfied before tenant would be obligated to exercise the ROFR and then close, the contract was not yet ripe and therefore, not a bona fide contract for which tenant’s ROFR had been triggered. Until the buyer satisfied or waived the contingencies, the buyer had not obligation to close and therefore, the buyer was not a bona fide purchaser.

Further, landlord’s action in advising the tenant that it would reject the offer and enter into a different purchase agreement with tenant indicated that landlord had not accepted the contract and was using it as a method to force tenant to purchase the property using the ROFR. Landlord wanted the best of both worlds – 4 more years of cash flow via rent, and a guaranteed buy out at the end of the term. Landlord could not get either of these through the contingent offer but had to accept the offer when tenant rejected the offer and put landlord on notice that the offer was not bona fide. This could come down to a shoving match if and when the proposed buyer satisfies its contingencies and attempts to close.

Lesson learned? Make sure you understand the triggering event of the ROFR before signing a lease whether you are the landlord or the tenant. Any ambiguity in an offer can be exploited and delay the exit strategy for one side or the other.

Usually, at the end of every year or at the beginning of the new year, landlords send out their “CAM Notices” or “Rent Notices” in which they inform commercial  tenants of their monthly rent for the upcoming year. Depending upon what type of commercial lease a tenant might have, one or more factors  may cause the rent to increase in the new year. Tenants should spend time examining these notices to ensure that the information contained in them is correct and consistent with the lease they entered into and perhaps modified afterward.

Some leases do not directly pass on any of the operating costs of the property. This type of lease is called a “gross lease”.  Notices received under gross leases may only detail an increase in the rent because of a stated increase or fixed percentage increase in the rent provided for in the lease at the outset when it was signed, or alternatively refer to an index, such as the Consumer Price Index as a basis for any rent adjustments in the coming year.

Under a “modified gross lease”, the landlord passes on some but not all of the operating costs of the property to the tenant, such as real estate taxes and insurance. In addition to containing the information noted above, when there is a modified gross lease, the landlord’s notice will probably state the anticipated cost of the passed through expense for  the coming year, and  the tenant’s monthly (i.e., 1/12th)  share of the these passed through expenses based upon the tenant’s pro-rata percentage occupancy of the building.

When all of the operating expenses for the property are passed on to the tenant by the landlord under a lease, the lease is typically referred to as a “net lease” or “triple net” lease. In this instance the rent increase or CAM notice is more elaborate. As before, a portion of the notice details the basis for any increase in the monthly rent due to a  preset rent increase in the lease or an external  formula  for adjusting the rent,  but now the portion of the notice dealing with the operating expenses of the property passed through to the tenant might expectedly contain more information than if the notice related to a modified gross lease.

No matter what the lease type, the tenant should carefully compare the information contained in the landlord’s notice to the lease (e.g., pro-rata percentage of building, basis for base rent increases in the lease independent of any pass through, specifics of the passed through expense, if any). If the rent increase was based upon a CPI increase, the back up for the CPI based increase should be provided.  In the case of both a modified gross lease and a net lease the tenant may want to ask the landlord for copies of the 2017 real estate tax bill and the 2017 insurance premium bill so that the tenant can compare those actual costs to the projected 2018 cost. If the landlord’s notice pertains to a net lease, the tenant may also want to ask for a copy of the property’s operating expense statement for 2017 to compare it to the projected operating expenses for 2018.

This coming year, tenants should also carefully review the monthly sales tax amount that they are being charged. Beginning on January 1, 2018 the state level sales tax will be reduced from 6% to 5.8 % for rental payments attributable to a tenant’s occupancy of a premises during January, 2018 and after.

Certain counties, such as Miami-Dade County, Florida impose a local option surtax on commercial or short term rents. . The recent change in the state level sales tax has no effect on local surtaxes. Thus, in Miami-Dade County, FL. the sales tax rate on monthly commercial rents will be 6.8% instead of the 7% that was previously charged.

The year is young and there is still time to save money by critically reviewing the landlord’s recent rent or CAM notice

Sometimes, when you think you’ve won, you’ve really lost. In my most recent case, I was very successful in working out a bad lease for a client.  Prior to coming to me, the client had been through several rent deferments.  The deferments had come due and the landlord was unwilling to give any further accommodations.  After months of negotiation, the tenant thought she had the parameters of a lease extension.  But, there were numerous open issues and financial terms to address.

After discussing the client’s financial position, I was able to negotiate a write-off of the deferred rent, over $300,000, and a tenant improvement allowance to modernize the space in exchange for only a 3 year extension of the lease and a slower increase in the rent. Only the TI would be guaranteed.  These negotiations took over 2 months.  We determined that the tenant did have an A/R balance of under $20,000 which would have to be paid as a condition of the new lease.  The client assured that the could make this payment and could fund any tenant improvements in excess of the TI allowance.  The tenant signed the new lease in early September.  We all felt like this was a win – the landlord, tenant and I.

After Hurricane Irma, I called to check on the client to make sure everything was ok as I had not received the fully executed lease back from the landlord. She complained that the landlord was stalling on signing the lease and therefore, she couldn’t start the TI.  Before I volunteered to check on this, I probed.  She complained that business loss was significant due to the hurricane and its aftermath and she was not able to make the promised payment and that landlord was being unreasonable, refusing to work with her.  Alarms started going off all around me.  This money should have been available before the hurricane at the time the lease was signed.  She started pointing fingers at everyone again – the landlord, the property manager, her partner, FPL, me.  Clearly, the issue was, is and always has been the tenant’s inability to pay the rent and other obligations prior to and since the execution of the modification.

What appeared to be a big, hard fought win looks to be turning into a loss. Could this have been avoided?  I don’t think so because the tenant, the client, has not been honest.  Mostly, she has not been honest with herself about what she could and could not afford.  But she also wasn’t honest with me and therefore, I could not properly advise her or handle the negotiations.  Expectations were set based on false premises and when we thought we had a win, we really lost.  Any bargaining position we might have had was lost as soon as she signed the lease.  If the tenant did not have the financial wherewithal to meet its obligations, either under the prior lease terms or under the renegotiated lease terms, she should have never signed the new lease.  As a result, we have lost the thrill of victory and now feel the agony of defeat.

We have all been there. We have negotiated deals where we’ve poured our blood, sweat and tears.  We have pushed and been pushed.  Our clients have struggled with decisions and asked for “one more concession”.  That concession causes the other side to ask for one more concession.  But finally, the deal is done.  The contract or lease is agreeable to both sides.  And then, the other side, the big corporation, has to “send it to committee” for approval.  The approval comes back with the deal killer term.

That is where I am today. My tenant client had run out of rent deferrals in a shopping center lease.  We negotiated a lease modification and extension where the deferred rent would be forgiven, landlord would provide a significant TI allowance and the base rent would be adjusted down to something the tenant could afford.  In exchange, we agreed to an extension of the term and to percentage rent.  We haggled for 2 1/2 months over every paragraph, sentence, clause and term.  In fact, my client had negotiated the modification for over 2 months before retaining me.  The landlord had geared up for eviction more than once.

But we crossed the finish line and agreed to terms. I requested execution copies.  But first, landlord had to get “committee approval”.  4 days later the phone call came.  The landlord, a well known mall developer and operator, had reviewed the terms of the modification in committee and made an adjustment.  Committee decided that the breakpoint for the percentage rent had to be adjusted downward to the last 12 months of tenants gross sales.  Of course that was unacceptable.  My client has been operating at a loss at the current level of sales which is why we she had been on a deferred rent program and why we were modifying the lease.  If the remodel were successful in achieving an increase in sales as we hoped, she could not achieve profitability.  And, the landlord would not allow for the break point to increase despite the fact that base rent would increase during the term.  Landlord was setting tenant up for failure.  They weren’t even considering tenant’s equity injection for its share of the cost of the TI.

If landlord continues to refuse to modify its position on this point, tenant will be forced to move out of the mall or to simply close. Where we thought we had a final agreement, one we thought was ready to go to signature, we only had a term sheet.  This “term sheet” cost the client nearly 5 months of time, time which could have been spent locating another space outside the mall, not to mention legal fees and design fees for the new remodeled space.  The client is beyond frustrated and it is difficult to explain how a major corporation can act this way and in cases like these, it is also very difficult to manage expectations.

Sometimes the facts of a case are just sad. A tenant recently came to see me because he was being evicted from the condo he was renting.  He was not going to contest the eviction.  There were only 30 days left on the lease any way and, one way or the other, he had to move.  He had found a new condo to rent, but when the new landlord did a background check, he found about the eviction and the circumstances surrounding it and denied the rental application.  Now, the tenant wanted some sort of revenge.

The circumstances leading up to the eviction stemmed from the complaints of a cantankerous neighbor. The neighbor was an elderly man who lived with his even older mother.  From the day the tenant and his fiancée moved into the condo, the neighbor had issues.  The mother accused the tenant and his fiancée of being drug dealers (she is a nurse and he is a medical technician and has an at home e-commerce business).  The neighbor began to call condo security and file noise complaints.  The first complaint was about 2 months after the tenant moved in.  The neighbor complained about “loud music” at 6:00 p.m. on a Saturday.  Security responded.  When they arrived, they could not hear any music, but asked the tenant to keep it down.  The next complaint was filed for loud talking on the balcony at night.  Security was again dispatched.  Several similar complaints were filed and, at least one time, the police were called.  The police found no disturbance and did not file a report.

However, because of the number of complaints, the condominium association determined that the tenant was in violation of condo rules and advised the landlord, the owner of the condo unit that it had to evict the tenant. If landlord failed to evict tenant, association would fine landlord.  Therefore, landlord filed the eviction.

Tenant asked me if he could sue the association for defamation. However, everything that the association would have told a potential landlord was true – there were numerous complaints against the tenant and an action to evict was pending.  It didn’t matter if the neighbor’s complaints were not true.  We turned our attention to the neighbor.  The neighbor’s harassment of the tenant was the direct cause of the eviction and the subsequent denial of the tenant’s denial of a new lease. Neighbor was the cause of all of tenant’s problems.  Was there anything that could be done for the tenant?  What damage had tenant suffered?

Tenant expressed that he only wanted his reputation back. The eviction was damaging to him and his fiancée.  We discussed whether we could get some letter from the neighbor explaining that his false accusations led to the eviction.  But what leverage did we have to get such a letter?  A lawsuit perhaps?  The theories were sparse:  tortious interference with contract and slander and defamation.  These would be costly to prosecute and very difficult to prove.  And worst of all, a “crazy” defendant is a dangerous defendant.  Moreover, it really is not a good idea to use the court system for this purpose – to extract an apology.  Unless the tenant was willing to go all in on a lawsuit, we couldn’t take the case.

Looking back, my advice would have been, had the tenant called me as the neighbor was harassing him, to fight the complaints with the association at the time that they were made. Set the record straight as quickly as possible.  Make sure that the security reports were thorough and accurate.  If this were done, the association would have had no grounds to force the landlord to evict and, as the neighbor continued to complain, the association would have eventually stopped listening.  Sadly, one cranky neighbor affected another person’s ability to occupy and enjoy one condo and to rent another.  Tenant should have fought back early and hard.

 

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