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Right of renewal and right of first refusal in commercial leases

On Behalf of | Oct 4, 2023 | Commercial Landlord Tenant Law |

When an owner of a commercial property owner in Arizona enters a lease with a tenant, the lease may include several clauses to address various issues that may arise during and after the tenancy. The right of renewal or right of first refusal are two clauses that are commonly included in commercial leases.

What is the right of renewal?

While residential leases generally do not exceed 12 months, commercial leases can last for decades before expiring. In the months leading up to the expiration of a commercial lease, the landlord will have to decide what to do next. Many landlords may choose to find a new tenant or ask the current tenant to renew, while others choose to take a break from leasing and choose to complete property renovations instead.

If the commercial lease includes a “right to renew” or “option to extend” clause, the current tenant will have the right to exercise their right to renew the lease within the time specified in the agreement. Lease renewals may also address possible rent increases, state requirements, modifications to the space, and notice requirements.

What is the right of first refusal?

Commercial real estate owners may lease out their property for several years before making the decision to sell the property. If a right of first refusal clause is included in the commercial lease agreement, the party holding the right of first offer (holder) will have the first opportunity to purchase the property. If the holder decides to buy the property, they will then have to make an offer within the specified time frame.

The seller will then have two options: they can accept the holder’s offer or reject the offer and continue to look for another buyer. If the seller is unable to find third-party buyer, they may go back to the holder and request a new offer (the prior offer is no longer valid).

Drafting a commercial lease can be complicated without the help of an experienced real estate attorney. Your attorney can review the terms of your agreement and make sure it is legally sound.