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The first right of refusal refers to a clause in a lease agreement which gives the tenant a priority position when the landlord seeks to sell the property. Before the landlord can sell to any other party, the tenant can choose to either purchase it themselves or ‘refuse’ to do so. 

This article will set out:

  1. how a first right of refusal works in practice;
  2. the perspective of both a tenant and a landlord in terms of a first right of refusal; and
  3. the difference between a ‘first right of refusal’ and an ‘option to purchase.’

How a First Right of Refusal Works in Practice

A first right of refusal refers to a clause in a lease agreement that gives a tenant a priority position to purchase when the landlord goes to sell the property. There are different ways of drafting this kind of clause. The most common kind works in the following way:

  1. the tenant and landlord negotiate a lease agreement with a first right of refusal;
  2. a few years later, the landlord would like to sell the property;
  3. honouring the right, the landlord must first ‘offer’ the sale to the tenant, who has a set period to consider the offer;
  4. if the tenant opts to purchase, they can do so, and the landlord cannot instead choose to sell to another party; and
  5. if the tenant ‘refuses’ the purchase, then the landlord can sell to other parties, so long as the sale is on “no less favourable” terms than the offer to the tenant (that is, the landlord must offer their best price to the existing tenant).

Another form of drafting the first right of refusal could, for instance, be that the purchase price, if the landlord would like to sell, is decided by a third party, like a registered valuer. 

Why Would Tenants Want a First Right of Refusal?

Particularly with large-scale commercial leases, such as for offices, tenants may make a significant investment in terms of customised furniture or fit-out. A first right of refusal gives a tenant additional flexibility to purchase if the landlord wishes to sell the property, which provides greater security of tenure. 

There is essentially no downside for a tenant to have this right, as there is no obligation to buy the property. It just strengthens their position and grants them priority status if they are in a position to purchase when the landlord comes to sell. This has other advantages. For instance, a tenant may not be in a position to buy when first leasing the property, but expects to be in that position in a few years. Negotiating the refusal will help the tenant purchase the property at that later point.

Why Would Landlords Want a First Right of Refusal?

Landlords do not typically want tenants to have a first right of refusal, as it reduces their flexibility at the point of sale. However, in negotiating with a potential tenant who is seeking this right, a landlord may be able to negotiate better terms (such as higher rent) on a lease in exchange for allowing the right.

Is it the Same as an Option to Purchase?

No, they are different kinds of legal rights, even if they are similar in some respects. The key difference is that an option to purchase gives a tenant the ability to exercise that right at any point during the tenancy. On the other hand, the right is only triggered when a landlord wants to sell the property. Neither option means the tenant necessarily has to buy the property, of course.

The other main difference is that an option to purchase is a form of caveatable interest, which means that it is a stronger and more legally defensible claim than a first right of refusal.

Key Takeaways

A first right of refusal is a clause in a lease agreement which gives the tenant of a property a priority position when that property is sold. Before the landlord can sell the property to any other party, the tenant can choose to either purchase it themselves or ‘refuse’ to do so. This gives tenants greater security and confidence to invest in the fit-out of the property they are leasing. For that reason, landlords may want to consider allowing tenants this option in return for more favourable terms elsewhere in the lease agreement. If you want to know more about drafting a first right of refusal, feel free to call LegalVision’s property lawyers on 0800 005 570, or complete the form on this page.

Frequently Asked Questions

How do I know if I have a first right of refusal?

Your lease agreement will spell out a first right of refusal. If it is not, you have no right.

Why would I want the right?

As a tenant, it means you can have more confidence that your property will not be bought by a competitor who could potentially evict you or change your leasing agreement unfavourably. At the very least, you would get a priority option to purchase at the point the landlord sells, protecting any investment you have made in the property.

Can landlords reject a first right of refusal?

Yes, landlords are under no obligation to grant first rights of refusal in lease agreements. However, if a tenant is adamant that they would like one included, it may be a make-or-break issue for the negotiation.

Is a first right of refusal a caveatable interest?

No. This is a common misconception, as an option to purchase is a caveatable interest. However, a first right of refusal is different from an option to purchase, as it is triggered at the point the landlord chooses to sell (and cannot be exercised at any time).

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