Top 6 Considerations for Landlords Navigating a Purchase or Right of First Refusal Option in Commercial Leases

When it comes to commercial leases, offering a tenant the chance to purchase the property or exercise a right of first refusal can be an appealing way to sweeten a deal. However, these options come with layers of complexity that can expose landlords to financial and legal risks if not carefully addressed. Whether you're negotiating terms or reviewing existing agreements, here are six critical considerations to keep in mind when negotiating these terms in a commercial lease.

1. Calculating the Purchase Price

Setting a clear and fair purchase price is the cornerstone of any option agreement, but how do you calculate that price?

The purchase price may be determined by the property’s fair market value either at the time the lease is entered into or when the right is exercised. Remember that calculating the fair market value should also be negotiated. Is an appraiser used? If so, be sure to negotiate who chooses them and what is the timing for determination.

Alternatively, you might consider setting a fixed price upfront, though this can require escalators or de-escalators to account for property upkeep, taxes, rental rates or other factors over time. Other methods include using the property’s assessed tax value or agreeing to match an external third-party offer.

The key is ensuring the price calculation aligns with the landlord’s financial goals and is enforceable in the applicable jurisdiction.

2. Understanding Triggers

Triggers define when a tenant can exercise their option. They can range from predictable events, like the lease’s expiration, to more situational ones, such as receiving an offer from a third party or hitting a specific property valuation threshold.

Keep in mind that some triggers, like a tenant merger or acquisition, might unintentionally activate the option unless explicitly excluded. Defining these scenarios with precision will help landlords avoid unintended sales or operational headaches.

3. Setting the Duration

How long should the tenant have to exercise their option? Some agreements offer perpetual rights, while others limit the window to a set number of years or a one-time-only opportunity. Deciding on the timeline can impact the property’s marketability and the landlord’s future flexibility. Carefully evaluate whether it’s worth allowing recurring opportunities to exercise the option or adopting a “use it or lose it” policy.

4. Handling the Closing Process

Closing terms often determine how smooth (or chaotic) the transaction will be. Be sure to spell out the answers to questions like who handles costs, what due diligence is required, financing contingencies, and how to navigate disagreements over purchase terms.

For example, if the tenant exercises a right of first refusal, the landlord may need to match the terms of a third-party offer, so make sure the offer the tenant needs to match are ones that are first acceptable to the landlord. On the other hand, a straight purchase option should include clear timelines for diligence, drafting agreements, closing procedures and default terms.

5. Structuring Payments

The payment structure for a purchase option or right of first refusal can make or break the financial viability of the arrangement. Some agreements allow tenants to pay for the option annually, quarterly, or monthly, while others require a lump sum upfront or upon closing. Additionally, landlords may decide to credit a portion of the tenant’s rent payments toward the purchase price. Being deliberate about the payment terms ensures the deal remains financially favorable and manageable.

6. Setting Conditions

Conditions attached to the purchase or option can protect the landlord’s interests. Common provisions include maintenance obligations for both parties, verifying the tenant’s creditworthiness, and ensuring no lease defaults exist at the time of exercise. It’s also crucial to establish how and when notices will be exchanged, as well as timelines for responding and closing the deal. These safeguards prevent disputes and protect the property’s value.

Offering a purchase or right of first refusal option can be a win-win for landlords and tenants, but only if the terms are crafted thoughtfully. By addressing these six key areas upfront, landlords can avoid common pitfalls, maintain control over their investment, and ultimately maximize the property's value.

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