Landlords should avoid giving a tenant a first right of refusal in lease


Giving a tenant a "first right of refusal" in a lease can lead to lawsuits and unintended consequences. If a landlord feels he must give the tenant a first right of refusal, make sure that it is properly and tightly drafted by an attorney.


Attorney Tom Olsen: Brandon, you're on News 96.5. Go ahead.

Brandon: Good morning sir. I've got a question for you. We are about to enter into a lease agreement with a neighboring property, and I just got a few questions on it. The people who we're going to lease to, they've talked about having first right of refusal if we do decide to sell the land, I am not exactly sure how that works. Then I'm also uneasy about-- The land is in a very desirable location, and if we're under lease and a legitimate offer comes in on the land and we decide to sell, how would that work if we break the lease?

Attorney Tom Olsen: Brandon, my suggestion to you is, do not give them a first right of refusal, and especially don't just do a lease and put these words tenant house first right refusal. You are going to get yourself in a legal quandary that's going to really come back and bite you, Brandon. You just need to be telling your tenant, look, no. I'll lease it to you but, hey, when you're ready to buy, you feel free to come make me an offer. If that tenant says, "You know what? I'm not going to lease it unless you give me a first option to purchase this", then Brandon, then you must go see an attorney and have that first right of refusal properly drafted to protect your interest in this piece of property.

Brandon: Okay, I understand. Can I ask you one more thing?

Attorney Tom Olsen: Go ahead.

Brandon: The property that will be leased is a part of my grandmother's trust, and in order to take an income into the trust, do we have to have a tax ID number?

Attorney Tom Olsen: Is your grandmother deceased?

Brandon: Yes.

Attorney Tom Olsen: Yes, so that trust is its own tax paying entity, it should have its own taxpayer ID number. And yes, it should start paying and filing for annual income taxes.

Brandon: Okay, very good. If the trust is paying an annual filing, what about distributions made out of that account to the the two shareholders?

Attorney Tom Olsen: That would be tax-free because the trust will have already paid taxes on that money.

Brandon: Excellent. The tax rate for the trust, is that determined by how much money it brings in or?

Attorney Tom Olsen: You'd have to talk to an accountant or CPA, I don't know.

Brandon: Okay, great. Well, I appreciate your help.

Attorney Tom Olsen: All right. Bye-bye.