Be Careful with Wording Added to a Lease

By Rick Lazar

Take care to understand exactly what you are agreeing to before you sign a lease. Certain “assumed to be” innocuous written statements inserted into a lease agreement can have significant legal implications.

Several years ago I was contacted by a property owner who wanted my company to list for sale an industrial building that she owned. The property was leased to a tenant who had a business operating at the property.

At the time the owner leased the property to the Tenant, the Tenant had asked for a Right of First Refusal to purchase the property (ROFR). Having no knowledge of the potential ramifications of the ROFR, the Owner agreed and added the following wording to the Lease Agreement “Tenant shall have a right of first refusal to purchase the property”. Without realizing it, the Seller had potentially clouded title of ownership to her property. Upon review of the lease agreement between the Owner and the Tenant, I noted the ROFR wording and informed the Owner that, before she could accept any offer to sell the property from a proposed Buyer, she would be required to present a similar offer to her Tenant. A requirement of the ROFR process includes providing the Tenant with the option to purchase the property per the terms of the offer received from the proposed Buyer.

The Owner made the decision to list the property for sale on the open market through my company. We received an offer to purchase the property from a proposed buyer. I advised the Seller that because the wording of the ROFR was extremely vague, it was my recommendation that she have an attorney provide assistance in clarifying the terms of the ROFR. The attorney sent a letter outlining the rules and conditions for exercising and proceeding with the ROFR process to the three parties involved in the transaction, the Seller/Landlord who was under obligation and potential cloud of title, the Tenant/Buyer who would benefit from the ROFR, and the Proposed Buyer.

The Owner submitted a copy of the offer received from the proposed Buyer to the Tenant. The Tenant informed the Owner that he wanted to exercise his right of first refusal to the purchase of the property and I notified the proposed Buyer of same.

The Tenant/Buyer then proceeded to purchase the property based on the rules and conditions provided by the attorney. The Tenant/Buyer engaged a broker to assist him in his purchase of the property and he requested that the Owner pay his broker a commission. The Owner was unwilling to pay a commission to the Tenant’s/Buyer’s broker as it had not been a requirement in the offer received from the proposed Buyer. The attorney informed the Tenant/Buyer that the Tenant/Buyer must comply with the exact terms of purchase previously agreed to by the proposed Buyer and the Owner. The agreed upon terms did not include the payment of commission to the Buyer’s broker, or any outside broker.

A purchase agreement was signed and escrow was opened for the purchase/sale of the property between the Tenant/Buyer and the Owner/Landlord. Ultimately the sale of the property was completed. At the close of escrow, the Tenant/Buyer filed a lawsuit against the Owner’s attorney for not allowing the Tenant’s/Buyer’s broker to represent him with compensation in his purchase of the property.

The lawsuit was settled in mediation and the Owner’s attorney was required to pay the Tenant/Buyer the equivalent of the amount of commission that the Tenant’s/Buyer’s agent would have earned.

The bottom line is that the inclusion of the ROFR in any contract deserves serious consideration and forethought and the specific wording is definitely not to be taken lightly, not even by attorneys.

Rick Lazar is Senior Vice President at Coldwell Banker Commercial Sudweeks Group and can be reached at (909) 793-3600.