Pre-emptive rights have the potential to complicate the sale process of a property. In order to remove these complicating factors, it is not uncommon to see a property owner paying its tenant some consideration to waive its pre-emptive right at the time that the property owner wants to offer its property to the market.
In our experience, property owners are often too quick to agree to grant pre-emptive rights to their tenants and they can come to regret granting such rights.
Prospective tenants often raise the following matters during lease negotiations:
To address these matters requires clarification of what the prospective tenant means by “first option” – typically an option or a pre-emptive right.
An option is an irrevocable offer open for acceptance in a particular way until a particular time. By exercising its option at any time during the option exercise period the tenant has the right to compel the property owner to sell or lease the property to the tenant on the agreed terms and conditions contained in the option agreement. As the offer is irrevocable, it cannot be withdrawn by the grantor of the option before the option exercise period expires.
A pre-emptive right is a right to purchase or lease a property in preference to any other person. It can be a right of first refusal or a right of last refusal. Both of these impose a negative obligation on the property owner, requiring it to refrain from selling or leasing the property to any other person before giving the tenant the opportunity of purchasing or leasing the property in preference to that other person. Pre-emptive rights are commonly called rights of first or last refusal.
A right of first refusal is a right to acquire an interest at a price nominated by the property owner. If the tenant does not accept the offer, the property owner is entitled to sell or lease the property to any other party within a defined time period following non-acceptance by the tenant of the offer to it on terms that are no more favourable to the other party than those offered to the tenant.
A right of last refusal is a right granted to a tenant to match an offer made by a third party to purchase or lease property from a property owner, which offer the property owner intends to accept if the right of last refusal is not exercised. A right of last refusal is often referred to as a “matching right”.
Despite these differences, the terms “first refusal” and “last refusal” are often used interchangeably, which can cause some confusion. In both circumstances the property owner cannot proceed to sell or lease its property to a third party if the tenant chooses to exercise its right. The particular clause in the contract granting the right of first or last refusal needs to be analysed in order to determine what the specific rights and obligations of the parties are.
Unlike a grant of an option, which confers a proprietary interest in the land (an equitable interest), a pre‑emptive right gives rise only to contractual rights and obligations between the parties.
In addition, a tenant can only exercise its pre-emptive right when the pre-emption event is triggered (i.e. only if and when the property owner wants to sell or lease the property) whereas the holder of an option can exercise its option at any time during the agreed option exercise period.
If a property owner agrees to grant a pre-emptive right to another party, it should be mindful of how this may complicate its ability to sell or lease its property. For instance:
The above examples show that pre-emptive rights have the potential to complicate the sale process of a property.
We can advise you in more detail if you have any enquires in relation to the above.
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