A tenant right of first refusal gives a tenant the chance to match an outside offer before the landlord sells the building. This guide explains how the right works, how to price it, and what the clause must say, from the standpoint of a Phoenix metro retail leasing practice.
By David Pierce, MHG Commercial
What is a tenant right of first refusal in a commercial lease?
A right of first refusal (ROFR) is a clause in a lease agreement that lets the tenant buy the property on the same terms as an outside buyer if the landlord decides to sell. The landlord receives a real offer, sends it to the tenant, and the tenant either matches it or lets it go. A tenant right of first refusal does not force a sale. It only controls what happens once the landlord has chosen to sell.
People searching for the first right of refusal in real estate usually mean a commercial lease, a residential rental, or a condominium association with a first look at a unit sale. The last two follow different rules, so this article stays commercial. A retail tenant with a long term build-out, or an industrial user with racking and power installed, asks for the right to protect that investment.
The right sits inside the lease or in separate agreements attached to it. A residential renter rarely finds one in a standard rental agreement. A commercial tenant negotiates it, and the landlord usually prices it into the rest of the deal.
How does a tenant right of first refusal work when the landlord wants to sell the building?
The process follows a fixed order, and each step is set by the clause in your lease.
- The landlord, now the seller, negotiates an offer from an outside buyer, usually a signed letter of intent or purchase contract conditioned on your right.
- The seller sends you written notice. A good clause requires the price, deposit, financing terms, closing date and other material terms in that notice.
- You have the election period in the lease to decide whether to match.
- If you match, you sign a purchase agreement on the same terms and the outside buyer drops out. If you decline, the landlord closes the transaction with that buyer and the lease continues with the new owner as your landlord.
How long does a tenant have to exercise a right of first refusal?
Each lease sets its own window. Some give only a few business days to elect and others give a few weeks, often with a separate period to close. Read your clause for the specifics, because a short window can run out before a lender issues a commitment, which is the most common way a tenant loses the right in practice.
Can a landlord sell the building without honoring a tenant's right of first refusal?
Not safely. A landlord who sells over a valid ROFR invites a dispute, and depending on the clause, the facts and state law, the tenant may seek damages or other remedies. A tenant can strengthen its position by recording a memorandum of the lease with the Maricopa County Recorder, which puts a later buyer on notice. Disputes like this go to attorneys and can take months.
Does a commercial tenant's right of first refusal survive a lease renewal or a sale?
Only if the clause says so. Many clauses tie the right to the original term, so an extension or renewal option needs its own language, and the clause should state that it binds successors and assigns. Check the carve-outs too: clauses often exempt transfers to family members, wills and estates, affiliates, and foreclosure. A sale of several properties in one transaction also needs a rule for how the price is allocated to your building.
How do you price a tenant right of first refusal before you exercise it?
There are two prices. The first is what you give the landlord to get the right during lease negotiation, which is often a longer term or a firmer rent. The second is the building itself, and the outside offer sets that number because you must match it. You do not negotiate the price down, so your work happens before the notice arrives.
A building's value at a given cap rate equals its net operating income divided by that cap rate. Cap rates move with the market and we never promise one, so run your own range. Your own rent is part of that income, which means a long lease at below-market rent changes what the building is worth to you versus an outside investor.
| Driver | How it moves your number | What to check |
|---|---|---|
| Outside offer price and square footage | Sets the price you must match | Whether the offer bundles other properties |
| Cap rate and net operating income | Value equals income divided by cap rate | Your rent schedule and lease expiry |
| Financing and deposit | Decides how much cash you need at closing | Whether you must match all-cash terms |
| Election and closing timeline | Short windows raise diligence cost | Days to elect and days to close |
| Costs after closing | Rent stops, taxes, insurance and repairs start | Security deposit credit and other tenants' lease agreements |
On the ownership side, the pros and cons are plain. The pros: control over your location, no surprise landlord, and a stake in the real estate under your business. The cons: tied-up capital, maintenance and reserve costs, and a landlord who may have charged for the right in rent. If you also own other property and want to defer gain, 1031 exchange services may fit the purchase, and your tax adviser should confirm it.
If you are weighing a purchase, start by writing down your own hold criteria, your price ceiling, your financing limits and your exit timeline, and talk through buying your own building with Pierce CRE before the response window on the offer closes.
At closing, the landlord's security deposit is usually credited or returned to you if you buy. Confirm that in the purchase agreement, along with how prorated rent and common area charges are handled. A landlord's rental property also has other tenants, and their lease agreements pass to you as the new owner.
Tenant right of first refusal vs. right of first offer: which one protects you more?
They are different rights, and a lease should never use the terms interchangeably.
- A right of first refusal applies after the landlord has a real offer. You match the outside buyer's terms.
- A right of first offer (ROFO) applies before the landlord markets the building. The landlord offers it to you first, and you respond to the landlord's terms.
A ROFR usually protects a tenant more, because you match a tested market price rather than the landlord's opening ask. A ROFO is easier to win in negotiation, since the landlord, as seller, keeps control of the price and avoids a buyer who walks away from a deal because of the tenant's right.
Where can I find a right of first refusal PDF and what should the clause say?
Some state bar and real estate associations publish sample forms, and legal form sites offer a right of first refusal PDF or a first right of refusal real estate template. Treat any template as a checklist. Your real estate agent or broker can flag the commercial points, and your attorney should adapt the document to Arizona law and your lease.
What the clause should say
A strong clause covers each of these:
- The event that triggers the right, and what counts as a bona fide offer
- Notice contents and how notice is delivered
- The election period and the closing period
- How non-cash terms, financing and package deals are matched
- Carve-outs for wills, family transfers, affiliates and foreclosure
- Survival through renewals, extensions and a sale
- A recorded memorandum and the remedy for breach
Red flags for tenants
Watch for a window shorter than your lender can close, a right personal to the original tenant that cannot be assigned, and vague wording on material terms, which invites costly disputes. Watch for a subordination agreement that lets a lender wipe out the right in foreclosure. To get out of a ROFR, the tenant usually signs a written waiver, often inside estoppel agreements or a lease amendment. If the landlord asks for one, treat it as something to trade for a concession.
What does the Office of Tenant Advocate DC do, and does it cover commercial tenants?
The Office of the Tenant Advocate in DC is a District of Columbia government agency that centers on residential rentals and the renters who live in them, including those weighing whether to buy a house or unit. It is not a resource for a commercial tenant, and it has no authority over a lease for a Phoenix retail or industrial building. A commercial tenant relies on the lease, the clause and attorneys.
Talk Through Your Building Purchase Before the Window Closes
Bring the landlord's notice and your lease to a conversation with David Pierce, and we will work through the numbers alongside your attorneys. To set that up, contact our brokerage.
