Right of First Offer (ROFO): How It Works in Commercial Real Estate
What is Right of First Offer (ROFO)?
A right of first offer is a legal agreement that gives a specific party the first chance to buy or lease a property before the owner markets it to anyone else. It's common in commercial real estate, especially when a landlord and tenant already have an existing relationship.
How Right of First Offer Works
When a property owner decides to sell or lease an asset subject to a ROFO, they must first present the opportunity to the rights holder, before listing it publicly or negotiating with others.
The ROFO process starts with formal notice
The owner sends a written offer to the ROFO holder outlining key terms: price, payment structure, and timing. This isn't just a heads up, it's a real offer the rights holder can act on.
The rights holder has a window to respond
Typically, they get 30 to 60 days to review the deal, perform due diligence, and make an offer. If they accept, the deal moves forward. If they pass, the owner is free to market the property elsewhere, but usually with restrictions.
Example
Say a tenant holds a ROFO on a warehouse. The landlord decides to sell and offers it to the tenant for $2 million. The tenant declines. If the ROFO includes a 5% price restriction, the landlord can only sell to others at $2.1 million or more. This prevents undercutting the original offer.
Related structures like a ground lease, NNN lease, or sale leaseback often include ROFO clauses to give strategic control or exit options to key parties.
Benefits of Right of First Offer
For landlords, ROFO can simplify deals, fewer marketing costs and quicker closes. For tenants or investors, it's a chance to buy without facing a bidding war.
| Party | Key Benefit | Strategic Use |
|---|---|---|
| Tenant or Investor | First shot at purchase before market exposure | Avoids competition and relocation risk |
| Property Owner | Faster, more controlled sale process | Minimizes broker fees and delays |
Working with a commercial broker or experienced commercial tenant representation advisor can help structure ROFO clauses that align with your goals.
The ROFO Holder's Options
Once a ROFO offer is received, the rights holder has two main options: accept the terms or decline the offer.
Option 1: Accept the offer
Before accepting, rights holders should weigh current market trends against the offer’s terms—especially price flexibility, contingencies, and timing. Owners should prepare clear documentation upfront to reduce delays, as a fast close preserves deal momentum and minimizes holding costs.
Option 2: Decline the offer
If they're not ready to move forward, or feel the terms aren't fair, they can walk away. The owner is then free to market the asset, though often within specific pricing or timing constraints outlined in the agreement.
These clauses are commonly found in net lease deals or longer term occupancy arrangements where the tenant wants a future purchase path. Investors should also be familiar with these rights when leasing a office, as they can affect expansion or acquisition plans.
What Happens if the ROFO Holder Declines?
If the ROFO holder passes on the offer, the owner can market the property to other buyers or tenants, but often within certain restrictions.
The rights holder may still be in play
If the asset doesn't sell, the owner can return to the ROFO holder. In most cases, they're not bound by their original bid and can renegotiate fresh terms.
This fallback mechanism protects sellers from a stalled sale while preserving a second shot for the ROFO holder.
In these scenarios, alternative financing tools like owner financed deals can re-open negotiations. Investors planning to sell commercial property should structure their ROFO terms carefully, especially when considering online commercial property auctions where pricing transparency and timing are critical.
Common Uses of Right of First Offer
ROFO clauses are most common in commercial real estate and private business deals. They offer a way to manage ownership transitions while preserving relationships and operational stability.
In commercial real estate
Landlords often include ROFO clauses in leases with long term tenants. This gives tenants priority to purchase the space they occupy, reducing the risk of relocation and providing a clearer path to ownership. ROFOs are especially common in office, retail, and land properties where long term occupancy or development rights are involved.
Explore commercial properties available that could involve ROFO terms or similar purchase opportunities.
Commercial Real Estate For Sale
When comparing different types of leases, tenants should check whether a ROFO is included, especially in situations where future property control is part of their business strategy.
In business partnerships
ROFO provisions help prevent outside parties from gaining ownership stakes without giving existing partners a chance to step in. This can be especially important in private companies where continuity and trust are essential.
If you're planning to purchase commercial property, or purchase a business, evaluating whether a ROFO exists, or negotiating one, can offer leverage during future disposition events or help lock in expansion opportunities.
Drafting Best Practices and Key Contract Clauses
Strong ROFO clauses are built on clarity, timing, and enforceability. Every term should be specific enough to prevent future disputes.
Core elements to include
A well drafted ROFO agreement defines:
- The specific asset covered by the right
- The procedure for giving notice to the holder
- The deadline to respond (typically 30-60 days)
- What qualifies as a valid offer
Preventing loopholes
To avoid sellers bypassing the ROFO, agreements often include:
- A pricing floor (e.g. seller can't accept a third party offer that's less than 5% higher than the declined ROFO offer)
- Anti-flipping clauses, preventing immediate resale
- Language that covers sales of controlling interest in an entity, not just the property
Right of First Refusal vs Right of First Offer
ROFO and ROFR both give select parties early access to a deal, but they trigger at different times, and that timing can reshape the entire transaction.
A right of first offer kicks in before the property hits the open market. A right of first refusal only activates after a third party buyer makes an offer. This distinction affects how buyers engage, how sellers market, and whether the deal feels clean or complicated.
| Feature | Right of First Offer (ROFO) | Right of First Refusal (ROFR) |
|---|---|---|
| When It Triggers | Before property is marketed | After a third-party offer is received |
| Who Makes the First Move | Rights holder submits initial offer | Third party offers first, rights holder matches |
| Impact on Sale Process | More predictable, fewer disruptions | Can deter buyers and complicate closing |
| Who It Favors | Typically the seller | Typically the rights holder (buyer) |
In some cases, hybrid approaches are used. For example, a lease might grant a ROFO initially, followed by a ROFR if the ROFO is declined, giving tenants layered protection without shutting down the seller's options.
It's also smart to think about how these rights interact with other deal structures. If you're negotiating terms that include a special warranty deed, ROFRs in particular may require additional timing buffers and disclosure steps to ensure compliance and buyer transparency.
The flowchart below breaks down how ROFO and ROFR are triggered and who benefits in each scenario.
Frequently Asked Questions
How does a right of first offer affect property valuation and marketability?
A ROFO typically has minimal impact on commercial property valuation since it doesn't block third party sales, but it can slightly narrow the buyer pool if the terms are unclear or overly restrictive.
What are the most common loopholes in ROFO agreements and how do I close them?
Common loopholes include entity transfers, bundled asset sales, or partial interest transfers, close them by defining "sale" broadly and adding anti-circumvention language.
What happens if the ROFO holder can't close due to financing?
Most agreements allow the seller to move on or offer a short extension if the buyer shows effort; using earnest money helps ensure seriousness without stalling the deal.
