ALI-ABA's Resource Materials: Modern Real Estate Transactions s1

TENANT OPTIONS AND RIGHTS OF FIRST OFFER/REFUSAL -- SAMPLE PROVISIONS AND COMMENTS

Linda A. Striefsky Thompson Hine & Flory LLP Cleveland, Ohio July, 1997

I. Expansion Options

A. Sample. Presume 20 year lease to anchor tenant for five floors, with 2 options for up to 2 floors of additional space, and with options effective after 5 and 10 years. The sample reflects the bargaining power of an early anchor tenant of a significant portion of a new building.

ARTICLE XXII

EXPANSION OPTIONS

22.1. Expansion Space and Exercise Procedures. Landlord hereby grants to tenant two (2) rights and options (each, an “Expansion Option”), each to lease up to two (2) additional full floors in the Building, which floors shall be contiguous initially to [top and bottom floors leased to Tenant by this lease] or to those floors optioned at a prior date that are contiguous to [same floors referred to above] and shall be unencumbered by other leases, renewal options or expansion options. Each floor subject to an Expansion Option contains 25,000 square feet of Rentable Area and is depicted on Exhibit ___. Tenant shall be entitled to exercise its first Expansion Option by notice given to Landlord (“Expansion Notice”) within the six (6) month period beginning on January 1, 2001 and ending on June 30, 2001 [presume that leaves 18 months before expiration of first 5 years of term] and to exercise its second Expansion Option by Expansion Notice given to Landlord within the six (6) month period beginning on January 1, 2006 and ending on June 30, 2006 [presume that leaves 18 months before expiration of first 10 years of term] (each, an “Expansion Notice Period”). The Expansion Notice shall specify the number of full floors as to which the Expansion Option is exercised (the “Expansion Space”). If during the Expansion Notice Period, Tenant exercises an Expansion Option, the Expansion Space identified in the Expansion Notice shall, as of the second January 1 immediately following the expiration of the applicable Expansion Notice Period (the “Expansion Option 1 ______Modern Real Estate Transactions, July 2006

- 1- Commencement Date”), be deemed to be added to and included in the Premises for all purposes of this Lease, irrespective of the date on which a formal amendment hereto shall be executed as contemplated by Section 22.2(g) below. During the period from the Expansion Option Commencement Date through and including the last day of the Initial Term, the Base Rent shall be increased by an amount equal to the Market Rent for the Expansion Space, determined as provided in Section 22.2, and Tenant’s Allocable Share for purposes of computing Additional Rent shall be increased to reflect the Rentable Area of the Expansion Space.

22.2 Terms and Conditions of Lease of Expansion Space. Tenant's lease of the Expansion Space shall be upon the same terms and conditions as are contained in this Lease, except as hereinafter provided:

(a) “Market Rent” means the rental which could be obtained by Landlord for the Expansion Option at issue, or from another tenant if Tenant did not exercise such option, for a lease commencing on the same day as the Expansion Option Commencement Date for the Expansion Option at issue. “Market Rent” shall (i) be stated in terms of Base Rent; (ii) take into consideration Tenant’s obligation to pay the Operating Expense Payment with respect to Operating Expenses; (iii) assume a lease having a term equal to the number of Lease Years remaining in the Initial Term as of the related Expansion Option Commencement Date, (iv) reflect that the Tenant shall accept possession of the Expansion Space, in a broom clean condition, and otherwise “as is,” subject to Landlord’s repair obligations set forth in Article ____ and subject to Article ___ [casualty loss], but shall exclude from consideration any improvements to the Premises made by Landlord which are above typical “building standard” improvements for comparable buildings in [City] as of such date and any improvements to the Premises which were installed by Tenant, at Tenant’s expense, at any time; and (v) reflect that the Tenant will receive no tenant finish or other space improvement work, allowances or other contributions from Landlord relating to the condition of the Expansion Space.

(b)(i) In the event Tenant is considering its exercise of any of the two (2) Expansion Options, Tenant may request (a "Tenant's Request for Expansion Option Proposal") Landlord's good faith determination of Market Rent for the Expansion Space as of the applicable Expansion Option Commencement Date ( "Landlord's Expansion Market Rent Proposal"). A Tenant's Request for Expansion Option Proposal may be made at any time during the third and the eighth Lease Years with respect to the Expansion Space to be made available to Tenant on the next Expansion Option Commencement Date.

Within thirty (30) days after Tenant's Request for Expansion Option Proposal is 2 ______Modern Real Estate Transactions, July 2006

- 2- given to Landlord, Landlord shall notify Tenant of Landlord's Expansion Market Rent Proposal.

If, within ten (10) days after a Landlord's Market Rent Proposal is given to Tenant, Tenant notifies Landlord that Tenant approves of Market Rent, as set forth in Landlord's Expansion Market Rent Proposal, as Market Rent for the Expansion Sapce, and that Tenant exercises its Expansion Option as to all or a portion of the Expansion Space (as identified in Tenant's notice), then Landlord's Market Rent shall be deemed to be the Market Rent for the Expansion Space so identified in Tenant's notice for the period from the Expansion Option Commencement Date through and including the last day of the Initial Term.

In the event that, within ten (10) days after a Landlord's Expansion Market Rent Proposal is given to Tenant, Tenant does not notify Landlord of such approval of the Market Rent, then within the ten (10) day period after expiration of Tenant's ten (10) day approval period set forth above, the parties shall confer and attempt to reach agreement as to Market Rent as of the Expansion Option Commencement Date. If the parties are unable to agree upon Market Rent within the ten (10) day conference period, then within ten (10) days after expiration of the ten (10) day conference period, each party shall, at its sole expense, select and retain an appraiser, with the qualifications set forth below, and shall notify the other party of its selection. Each appraiser shall be independent and shall be certified as an MAI appraiser or as an ASA appraiser and shall have had at least three (3) years' experience within the previous ten (10)years as a real estate appraiser working in the area, with knowledge of rental rates and practices.

(ii) Within sixty (60) days after a Landlord's Expansion Market Rent Proposal is given to Tenant, each appraiser shall determine Market Rent as of the applicable Expansion Option Commencement Date, and shall notify both parties of the determination. In the event that only one party selects an appraiser and notifies the other party of its selection during the ten (10)-day period, and such party's appraiser gives such notice within the sixty (60) day period, the determination of Market Rent made by that appraiser shall be deemed to be the proposed Market Rent during the period from the Expansion Option Commencement Date through and including the last day of the Initial Term.

If both appraisers notify both parties of their respective determination of Market Rent within the sixty (60) day period, and if the higher appraisal is less than or equal to one hundred ten percent (110%) of the lower appraisal, the average of the two (2) appraisals shall be deemed to be the proposed Market Rent. If the higher appraisal is greater than one hundred ten percent (110%) of the lower appraisal, each party will cause the appraiser selected by it to supply the name of one (1) appraiser having the qualifications set forth above and an employee of Tenant shall draw one (1) name of the two (2) provided. In the event the appraiser 3 ______Modern Real Estate Transactions, July 2006

- 3- selected by only one (1) party supplies the name of an appraiser during such ten (10) day period, the appraiser named by such appraiser shall be the Third Appraiser.

(iii) Within thirty (30) days from the date of his appointment, the Third Appraiser shall make his determination of Market Rent as of the applicable Expansion Option Commencement Date. If the Third Appraiser's appraisal is equal to one (1) of the appraisals of the first two (2) appraisers or greater than the lower of the two (2) appraisals but less than the higher of the first two (2) appraisals, the Third Appraiser's appraisal shall be deemed to be the Third Appraiser's proposed Market Rent. If the Third Appraiser's appraisal is not equal to one (1) of the appraisals of the first two (2) appraisers or greater than the lower of the two (2) appraisers but less than the higher of the two (2) appraisers, the appraisal furthest from that of the Third Appraiser shall be disregarded and the average of the remaining two (2) appraisals shall be deemed to be the Third Appraiser's proposed Market Rent during the period from the Expansion Option Commencement Date through and including the last day of the Initial Term.

(iv) Within ten (10) days after Tenant is notified of the Third Appraiser's proposed Market Rent during the period from the Expansion Option Commencement Date through and including the last day of the Initial Term, then Tenant shall notify Landlord (A) that Tenant exercises its Expansion Option as to all or a portion of the Expansion Space (as identified in Tenant's notice) and approves of Market Rent as so proposed, in which case Market Rent as so proposed and approved shall be deemed to be Market Rent for the Expansion Space so identified in Tenant's notice for the period from the Expansion Option Commencement Date through and including the last day of the Initial Term, or (B) that Tenant disapproves Market Rent as so proposed, in which case Tenant is deemed to have elected not to exercise its Expansion Option.

(v) If Tenant does not issue Tenant's Request for Proposal during the third or eighth Lease Year, as the case may be, but (i) Tenant issues Tenant's Request for Proposal and (ii) also notifies Landlord that Tenant exercises its Expansion Option, during the fourth, or ninth Lease Year, as the case may be, then Market Rent shall be determined as set forth above, except that the determination of Market Rent made under whichever of Section 25.2(a)(ii) or (iii) is applicable shall be binding on the parties.

(c) The Additional Rent shall be determined and paid according to the method set forth in Section ___, provided: (i) that the Additional Rent attributable to any Expansion Space which is leased by Tenant from time to time shall be calculated separately as to each such segment of Expansion Space; and (ii) that in lieu of the Base Operating Expenses set forth in Section ___, the Base Operating Expenses as to each such segment of Expansion Space for the purpose of calculating 4 ______Modern Real Estate Transactions, July 2006

- 4- Additional Rent for Operating Expenses during the Initial Term shall be the Operating Expenses for the Lease Year previous to the Lease Year in which Tenant's possession of the Expansion Space commences; during any Renewal Term, the Base Operating Expenses as to each segment of Expansion Space shall be the same as those applicable to the balance of the Premises. Tenant's A1locable Share with respect to the Expansion Space shall be the decimal equivalent of a fraction, the numerator of which is the Rentable Area of the Expansion Space and the denominator of which shall be the Rentable Area of the Building.

(d) Any lease of Expansion Space shall have the same expiration date as the Term of this Lease, as such expiration date may be extended by the exercise by Tenant of the Renewal Options contained in this Lease. Without limiting the foregoing, Tenant's Renewal Options shall apply to all Expansion Space, as well as to the Premises originally demised under this Lease, except if and to the extent that Tenant has exercised a Surrender Option as to all or any portion of the Expansion Space.

(e) Tenant shall have the right at any time during the third and eighth Lease Years, as the case may be, or during any Expansion Option Exercise Period, to inspect the Expansion Space during Normal Business Hours.

(f) Landlord shall deliver possession of the Expansion Space to Tenant in a broom clean condition, with the improvements set forth in the Base Building Specifications for the subject floor and otherwise "as is," subject to Landlord's repair obligations set forth in Article ____ [maintenance obligation] and to Article ____ [damage and destruction]. In the event Landlord's tenant or any third party removes any fixtures or personal property from the Expansion Space, Landlord shall promptly repair any damage caused by such removal.

(g) Prior to the Expansion Space Commencement Date, Landlord and Tenant shall enter into a lease amendment to this Lease setting forth in full all of the terms, provisions and conditions as described in this Article XXII, including, without limitation, identification of the Expansion Space, the Rentable Area of the Expansion Space, the Expansion Option Commencement Date, the Base Rent attributable to the Expansion Space and Tenant's A1locable Share for purposes of calculating Additional Rent with respect to the Expansion Space. Any failure of Landlord or Tenant to enter such an amendment shall not affect other respective rights and obligations pursuant to this Article XXII.

(h) Each Expansion Option granted herein shall only apply to Expansion Space which is made available during each Expansion Option Exercise Period. Each Expansion Option shall be prior to any other option to lease or sublease expansion or additional space granted to other tenants in the Building. Nothing 5 ______Modern Real Estate Transactions, July 2006

- 5- contained in this Article XXII shall in any way restrict or limit Landlord's right to enter into any lease for all or any part of the Expansion Space and grant options for renewal and extension thereof, once Tenant shall have waived Expansion Options provided in this Article XXII.

22.3 Access to Expansion Spaces. With respect to each of the Expansion Options, if Tenant elects to perform any tenant improvement work, Tenant shall be given access to the Expansion Space in question not less than ninety (90) days prior to the Expansion Option Commencement Date in question for such Expansion Space, provided such Expansion Space is available, under a license identical as to terms and conditions as the license being provided with respect to Tenant's Work under the Workletter to this Lease, so as to enable Tenant to perform the improvement work necessary relative to such Expansion Space.

22.4 Partial Expansion Option. With respect to each Expansion Option, Tenant shall have the right to lease an amount of the Expansion Space which is less than two (2) full contiguous floors, so long as the amount is in full-floor increments.

B. Considerations as to expansion rights

1. How much expansion space may be leased? May the tenant elect to take less than the maximum space made available under the expansion right?

2. What is the required condition of the expansion space upon delivery? Is there any tenant improvement allowance for the expansion space? If so, when may the tenant have access to the expansion space to commence work?

3. Where will the expansion space be located? Is the tenant assured of space that is contiguous to its other space? What is the Rentable Area of the Expansion Space?

4. When must tenant exercise its option to lease additional space? How long is the exercise window open?

5. How must tenant exercise its option?

6. What is the consequence of the tenant’s failure to exercise on time? Is the landlord required to give tenant a warning if the exercise period is drawing to an end without delivery of an exercise notice by the tenant? Landlords seldom agree to do so, on the theory that, if the option is so important to the tenant, the tenant will not forget about it. This sample also includes in Section 22.2(a)(v) a fallback position for the tenant who exercises late, although it is risky because it strips away protection against Market Rent that is too expensive for the tenant. 6 ______Modern Real Estate Transactions, July 2006

- 6- 7. How will Base Rent be established for the expansion space? Depending on how soon the expansion options must be exercised, the Base Rent may be agreed to in the lease, much as rent step-ups might be set in advance.

In the sample, base rent is set at market rent. Initially, the establishment of market rent for the expansion space is by agreement of the parties. If that fails by a specified deadline, appraisers are used. This type of procedure to establish market rent has many steps and consumes months of time. When the time demands of the rent procedure are combined with the landlord's need to know whether or not the space will be taken by the tenant and the tenant's need to prepare the space or to make other plans to satisfy its needs, the Expansion Notice Period starts, in this case, two (2) years before the date that the expansion would be effective. As a protection to the tenant, the tenant is permitted to rescind its exercise of the option to expand if the rent determined by the appraisal procedure is not acceptable; this feature will be available only to tenants with strong bargaining power. An alternative protection would be to set a cap on the rent applicable to the expansion space. (The same considerations would be applicable to establishment of rent for an option term.)

8. How will Additional Rent (for common expenses) be established for the expansion space? Assuming that the Additional Rent is based upon increases in expenses over a base year, will the base year for the expansion space be different from that for the balance of the lease? If a different base year is used, a separate calculation of Additional Rent will be necessary for the original space and for each segment of expansion space, as well as a separate Allocable Share for each segment. If the separate calculation approach is used, all of the Premises would be joined in one calculation if and when the base year is re-set, such as at the beginning of a renewal term.

9. Be sure that the expansion space is not subject to any other previously granted leases or previously granted options or rights of first refusal.

10. A formal amendment to the lease should be executed, to memorialize the details of commencement date, rent, etc. An amendment to any recorded memorandum of lease would be advisable as well. Finally, consider whether any subordination, non- disturbance and attornment agreement ("SNDA") needs attention, or whether any aspect of such an amendment requires lender approval. The exercise of an expansion option itself certainly should not trigger a lender approval right, but often the terms of a SNDA will require lender approval for any lease amendment. The exercise of an expansion option and preparation of the attendant amendment frequently generates discussion between the landlord and tenant of other issues that may result in lease amendments not directly related to the expansion option.

11. The landlord obviously needs to carefully map out the expansion and option rights given to various tenants, so that floors subject to such options may be leased short-term 7 ______Modern Real Estate Transactions, July 2006

- 7- but will be available if the options are exercised.

II. Option to Surrender

A. Sample. Presume 20 year lease, with two options to surrender up to 2 floors of additional space, and with surrender options effective after 7 and 12 years. The sample reflects the bargaining power of an early anchor tenant of a significant portion of a new building.

Landlord hereby grants to tenant two (2) rights and options (each, a “Surrender Option”), each to terminate this Lease as to up to two (2) full floors of the Premises, which floors shall be contiguous to each other and to only one (1) other floor of the Premises. Each floor subject to a Surrender Option contains 25,000 square feet of Rentable Area. Tenant shall be entitled to exercise its first Surrender Option by notice given to Landlord (“Surrender Notice”) within the six (6) month period beginning on July 1, 2004 and ending on December 31, 2004 [presume that leaves twelve (12) months before expiration of first 7 years of term] and to exercise its second Surrender Option by Surrender Notice given to Landlord within the six (6) month period beginning on July 1, 2009 and ending on December 31, 2009 [presume that leaves twelve (12) months before expiration of first 10 years of term] (each, an “Surrender Notice Period”). The Surrender Notice shall specify the number of full floors as to which the Surrender Option is exercised (the “Surrender Space”). If Tenant’s Surrender Notice is timely given, this Lease shall, as of the second January 1 immediately following the expiration of the applicable Surrender Notice Period, be deemed to be terminated as to the Surrender Space identified in the Surrender Notice for all purposes of this Lease. Upon such termination of the Lease as to the Surrender Space, the Base Rent shall be decreased by the amount equal to the Rentable Area of the Surrender Space multiplied by $______[the Base Rent per square foot of Rentable Area], and Tenant’s Allocable Share shall be decreased to that amount equal to the total Rentable Area of the Building [define in Lease by actual number of square feet of Rentable Area] divided by the Rentable Area of the remaining Premises.

B. Considerations as to surrender rights

1. In this era of downsizing, a right to surrender excess space may be as important to a tenant as the right to expand.

2. How much space may be surrendered? May the tenant elect to surrender less than the

8 ______Modern Real Estate Transactions, July 2006

- 8- maximum space made available under the surrender right? Consider complications caused by surrenders of partial floors.

3. Where will the surrender space be located? Will the tenant's remaining space be contiguous? What is the Rentable Area of the Surrender Space?

4. When must the tenant exercise its option to surrender space? How long is the exercise window open?

5. How must tenant exercise its option?

6. What is the consequence of the tenant’s failure to exercise on time? Is the landlord required to give tenant a warning if the exercise period is drawing to an end without delivery of an exercise notice by the tenant?

7. Has tenant agreed to undertake any obligations due to the number of floors leased that should be shifted to the landlord or to another tenant after surrender of a specified number of floors?

8. What is the required condition of the surrender space? Will any alterations be necessary to sever tenant's remaining Premises from the surrendered space? If so, the lease should specify whether landlord or tenant is responsible for such work.

9. As is the case with the addition of space to the Premises, the surrender should be memorialized by an amendment to the lease and to the memorandum of lease.

III. Option to Renew

A. Sample. Presumes 3 renewal rights, for 5 year each, with rent adjusted to Market Rent. The sample reflects the bargaining power of an early anchor tenant of a significant portion of a new building.

Landlord hereby grants to Tenant three (3) rights and options to renew the term of this Lease, each such right and option (each, a “Renewal Option”) applying to one (1) additional period of five (5) years (each, a “Renewal Term”). Each renewal shall be on the same terms and conditions set forth in the Lease for the initial five (5) year Term, except that, during each Renewal Term, the Base Rent shall be amended to equal the Market Rent for the Premises for such Renewal Term, determined as provided in Section ___. Tenant shall be entitled to exercise a Renewal Option by notice given to Landlord (“Renewal Notice”) within the six (6) month period beginning eighteen (18) months prior to the expiration of the 9 ______Modern Real Estate Transactions, July 2006

- 9- initial Term or the then current Renewal Term, as the case may be, and ending twelve (12) months prior to the expiration of the initial Term or the then current Renewal Term, as the case may be. If Tenant’s Renewal Notice is timely given, the Term of the Lease shall be deemed to be extended for all purposes of this Lease.

B. Considerations as to renewal rights

1. When must tenant exercise its option to renew the term? How long is the exercise window open?

2. How must tenant exercise its option to renew?

3. What is the consequence of tenant’s failure to exercise on time? Is the landlord required to give tenant a warning if the exercise period is drawing to an end without delivery of an exercise notice by the tenant? 4. Do all of the terms of the original lease apply to the renewal term? If the Tenant exercises a renewal option, perhaps additional expansion rights or surrender rights should be considered. What about the right to renew--is that, too, renewed?

5. Will the rent change during the renewal term? If so, how will the new rent be determined? Consider the following possibilities:

a. Can rent go down as well as up, or stay the same? (This is not typically provided for but, especially in a period of little inflation, a tenant should consider this issue.)

b. Adjust rent by predetermined amounts. This is not done very often.

c. Adjust rent to “Market Rent”, as defined in the lease. Various methods may be used to determine Market Rent, such as use of appraisals. Be careful to consider, however, the basis for the appraisal. For example, should the appraisal take into account the finish work paid for by the Landlord? How about that paid for by the Tenant?

d. Adjust the original rent by the change, or by a fraction of the change, in the CPI. If the CPI is used, which CPI index should be used?

e. Adjust the rent to that amount agreed to by the parties. NOT (just checking to see if you are still paying attention)--an agreement to agree is not likely to be enforceable. However, many rent adjustment clauses first provide for a period of negotiation between the parties, with use of another mechanism, such as appraisal or CPI adjustment, if negotiation is not successful. 10 ______Modern Real Estate Transactions, July 2006

- 10- IV. Option to Purchase

A. Sample. Presumes Tenant may purchase all of the Premises, or one of two components, with pre- set price subject to adjustment yearly by specified percentage. The sample reflects the bargaining power of an early anchor tenant of a significant portion of a new building.

Landlord hereby grants to Tenant the right and option to purchase the Premises in its entirety, or, at Tenant’s option, only Parcel 1 or only Parcel 2, in each of such three cases, together with the building(s) and other improvements located thereon (the “ Purchase Option”). Tenant shall be entitled to exercise the Purchase Option by notice given to Landlord (“Purchase Notice”) at any time prior to the date that is twelve (12) months prior to the expiration of the initial Term or the then current Renewal Term, as the case may. If Tenant’s Purchase Notice is timely given, the purchase shall be on the following terms and conditions:

1. The purchase price shall be the “Value of the Premises” or, if Tenant elects to purchase only one of the Parcels, the “Value of Parcel 1" or the “Value of Parcel 2", as the case may be, defined as follows: If the Option is exercised within the first Lease Year, the Value of the Premises shall be $10,000,000, being the sum of the Value of Parcel 1, namely, $5,000,000, and the Value of Parcel 2, namely, $5,000,000; thereafter, the Value of the Premises and the separate values of Parcels 1 and 2 shall each increase by ___% of the respective values set forth above, effective from and after each successive January 1.

2. [Set forth in the lease, or in a purchase agreement attached as an exhibit, all of the typical provisions you would include in a purchase agreement for the Premises. Of course, certain provisions will be revised to reflect the fact that the purchaser has been in occupancy as a tenant. For example, if the lease is triple net, there would be no closing proration for taxes or other expenses.]

B. Considerations as to purchase option

1. When must tenant exercise its option to purchase? How long is the exercise window open?

2. How must tenant exercise its option to purchase?

- 11- 3. What is the consequence of tenant’s failure to exercise on time? Is the landlord required to give tenant a warning if the exercise period is drawing to an end without delivery of an exercise notice by the tenant? When does the right to exercise end, if the tenant forgets to exercise or decline and the landlord forgets to remind the tenant?

4. May the tenant elect to purchase less than all of the Premises?

5. Options to purchase present the usual conundrums regarding setting the price. (See discussion above regarding rent adjustments for renewal terms.) It is somewhat unusual to have an agreement on a price, even for only one year, but I have seen it occasionally.

6. It is very important not to scrimp on the specificity of the terms of purchase. This will constitute the purchase agreement, so give it your best shot, in keeping with the value of the deal. The number of pages devoted to the purchase provisions may equal those for the balance of the lease provisions.

7. In setting the exercise deadline, keep in mind the time needed to achieve a closing, just as you would if you were simply entering into a purchase agreement. Do the option purchase terms contemplate that the tenant will have done its due diligence, including obtaining a title examination and survey or environmental assessment, prior to exercise? Or is the landlord obligated to provide those items? What happens if the due diligence discloses any unsatisfactory conditions, or if any conditions to closing are not satisfied-- does the tenant have the right to rescind the option to purchase, and to stay in occupancy for the balance of the lease term? What if the closing is delayed so that a title problem may be cured--is the lease term automatically extended? How far in advance does the landlord want/need to know whether there is going to be a purchase or that the tenant is leaving at the end of the lease term?

7. When using a price adjustment mechanism that increases multiple times from a set base, consider whether the increases are compounded or not. For example, the percentage increase provided for in the sample is not compounded. If it were, the increase each year would be against the value applicable in the preceding year. Also, consider the effect of casualty loss or of a taking on the determination of value.

V. Right of First Refusal/First Offer to Purchase or Lease

A. Sample provision See Right of Refusal Agreement in the materials

- 12- B. Considerations as to Right of First Refusal/First Offer to Purchase or Lease

1. Whether a right of first offer or first refusal to purchase or lease, similar issues should be considered, .

2. A right of first offer is dependent upon a third party's interest in purchasing or leasing the property in question, as evidenced by an executed purchase offer or lease offer. Rights of first offer are considered to have a considerable chilling effect on the marketability of property, as many potential purchasers or tenants will not be interested in investing the time and money in developing an offer that may be snatched away by the holder of the right of first refusal.

A right of first offer is dependent upon the owner's decision to sell or lease and development of the terms and conditions upon which a sale or lease would be acceptable to the owner. It is perhaps less difficult for an owner to handle than a right of first refusal, but can bring considerable complications with it, as the proffered terms and conditions, if not acceptable to the holder of the right of first offer, typically then must be proffered to third parties. Negotiated changes to the terms and conditions that are favorable to the buyer or lessee (consider the issues that raises) may trigger a requirement to re-submit the deal to the holder of the right of first offer. That begins to sound more like a right of first refusal.

3. Consider what will trigger the right of first refusal or the right of first offer. Is a sale or lease of the real estate necessary, or will it be triggered by a sale of an interest in the entity owning the real estate? Any interest, or only a majority or controlling interest? How about transfer of an interest to an affiliate or a related party or a trust for one's children? Will a long-term ground lease trigger the right to purchase, or only a proposed transfer of fee title?

4. When must the right of first refusal or of first offer be exercised? A right of first offer or first refusal typically has a short fuse (sometimes as short as a couple of weeks). The holder of the right can be at a terrible disadvantage if the third party purchaser has already lined up financing, and so is able to offer a deal with no financing contingency.

5. How must the right of first refusal or first offer be exercised?

6. Generally, courts do not tolerate efforts to trick up a third party offer so as to defeat a right of first refusal. That does not mean that no one tries that route. Techniques include making an offer for property in addition to the property that is subject to the right of first refusal, or structuring the deal as an exchange, or including unique deal points (i.e., personal service contracts with the third party purchaser). See, e.g., [insert cases]

7. When considering whether to exercise a right of first refusal, or in drafting one, 13 ______Modern Real Estate Transactions, July 2006

- 13- remember that the holder of the right has to take or leave the deal offered by the third party, unless, of course, the right of first refusal permits a deviation. The right of first refusal could provide, for example, that, notwithstanding the terms of the third party offer, the holder of the right must be allowed a specified time to arrange financing.