Future Rights in Real Property, Part II: Practice Pointers

In Part 1 of my series on future rights, I described the 4 primary future rights with respect to commercial real estate as follows: (i) Option; (ii) Right of First Refusal; (iii) Right of First Negotiation; and (iv) Right of First Opportunity.  Anytime, my clients indicate an interest to either grant or receive a future right, I always try to critically discuss the following issues:

First, are there competing interests for the relevant real property that makes up the subject matter of the future right?  In other words, the grantor of such a right should make sure that it has not given the same right or conflicting rights to multiple beneficiaries.  For example, in the case of office space, one tenant may be entitled to an expansion option to certain space while another tenant may possess a right of first refusal that is pre-conditioned upon the first tenant not exercising its option.   A third tenant may also have a right of first refusal that doesn’t trigger until the rights of tenant one and tenant two pass on the property.  Practice Point 1: unless an owner is absolutely sure no rights have been granted to any third parties with respect to a specific piece of property, the owner should always start with the position that any future right is granted “subject to the rights of any third party”.  Beneficiaries should always request that other interested parties be listed with specificity.

Second, another issue that should absolutely be discussed between the parties when granting a future right is whether the right is merely a personal obligation of the granting party or whether the intent is to actually bind successors in interest as well.  Much of the litigation dealing with future rights involves whether successors or unrelated third parties are bound or had notice of the future right.  Practice Point 2: The key question is whether the right runs with the land.  If the answer is “Yes”, should a document evidencing the right be recorded in the public record?  The competing interests will be the Landlord’s desire not to clutter title or potentially chill marketability of its property and the beneficiary’s desire to safeguard any right it might have by “putting the world on notice” with recording.  There are several factors that should be considered when determining whether to place a future right of record.  The factors I consider are as follows: (i) how valuable from a financial standpoint is the future right; (ii) what is the nature of the property; (iii) what is the nature of the right; (iv) what are the consequences of the granting party reneging on the right; and (v) trust factor.

Practice Point 3: Always critically evaluate any future rights that may be negotiated between the parties.  I have seen numerous term sheets where the future right was unclear or ambiguous.  Owners should understand exactly what they are giving up by granting a future right and how it may negatively impact marketability of the real property.  To the extent a tenant or prospective purchaser asks for a future right, the owner should critically discuss with such party what the beneficiary’s exact needs are and narrowly tailor the right to satisfy the need.  More often than not, in my experience, future rights are requested by prospective beneficiaries as a “nice to have” rather than a “must have” option.