It's a common story in the real estate world: two like-minded companies meet, learn they have common interests and goals, get to know each other well, and ultimately decide to take their business relationship to the next level—a joint venture to acquire or develop a property. When the venture obtains financing for its project, the lender will frequently focus on corporate transfer issues, including possible changes of control that may result from the exercise of joint venture agreement dispute-resolution mechanisms, which may also trigger a default under the loan documents. As in many relationships, however, no one wants to think about a possible break up years down the line. Despite this, parties often recognize that, should a conflict arise, there needs to be some assurance that the venture will not be forced into a distressed sale or face an acceleration of their loan, triggered by a non-permitted transfer.
Frequently, real estate investors rely upon a "right of first offer" (ROFO) to resolve, or forestall, disputes. Under a ROFO, one partner has the opportunity to acquire the other partner's interests in the joint venture. In the stress of closing a transaction, the parties may rely on a quick, boilerplate ROFO provision in the joint-venture agreement. Unfortunately, as more and more joint-venture partners are finding out, a hastily drafted ROFO provision can create significant litigation headaches down the line, thrusting the property into distress and, consequently, the underlying loan. For this reason, careful and thoughtful drafting of ROFO provisions is becoming an absolute necessity to protect a ROFO holder once the "honeymoon" is over. Lenders' counsel should also watch out for poorly-drafted provisions that may threaten to distract the property owners from operating the property in a profitable manner sufficient to pay back the loan.
What Is a "ROFO"
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