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Which one is better for tenants? Expansion rights definitely come in handy when you have outgrown your current space and want first dibs on more space in the building or complex. Not all expansion rights are created equally, and that is why you need to know the difference between a right of first offer and a right of first refusal.
Since these are rights that are to a tenant's benefit, be sure that they are negotiated in the letter of intent as they will not appear in the landlord's lease template.
A right of first offer really just means that the tenant is notified by the landlord prior to the landlord updating their own website and marketing materials.
There is nothing particularly special about this right, except that the landlord will provide a period of time in which they will not offer the expansion space to the general public.
This is not of much real value in a balanced or tenant's market as the space will be available for some time before leasing.
A hot market is a different story however, and the first crack at leasing more space may be something you are interested in acting on right away before the space is leased quickly.
Think of it is a juicy insider trading tip that is perfectly legal.
A right of first refusal is very unattractive for the landlord.
The landlord may spend several months marketing space and finally when they find a suitable tenant for that space and complete the negotiations.
You then have the right to squash that deal and you will take the deal for yourself.
It provides you the luxury of letting the landlord do all the legwork to lease the space and when the landlord has an arrived-at deal with a prospective tenant, you magically scoop that deal away and take the space for yourself (on the same terms).
But that is bad for the prospective tenant - why is it bad for the landlord?
While the landlord wins in either case (whether you scoop the space or allow the other tenant to have it), it really puts a damper on the landlord's marketing efforts.
As soon as most tenants find out that there is another tenant that could eat their lunch they tend to move on to other potential spaces that do not have any such encumbrances.
Since it is such a party killer for landlords, rights of first refusal are hard to negotiate - typically just provided to very large tenants.
You may want to consider the following as a top of the line right of first refusal (taken from a recent commercial lease provided from a client in California:
The Tenant shall have a continuous right of first refusal to lease any premises (the "Additional Premises" cross-hatched on Schedule "A") on the third (3rd) floor at any time during the Term of the Lease if, as and when the Landlord receives a bona fide offer to lease from a third party. The Landlord shall notify the Tenant in writing and submit a copy of such offer to the Tenant and the Tenant shall have five (5) business days to agree to lease the Additional Premises on the same terms and conditions of such offer, save and except for the Term which shall be co-terminus with the Tenant's existing Expiration Date of <date> and any inducements which will be prorated for the Term, failing which the Landlord may complete the lease with the third party.
Note the word continuous. This allows the right to survive.
Let's say you opt not to trigger your right but the deal falls apart between the landlord and prospective tenant.
Or let's say it is a short term lease, less than the length of yours.
Then "continuous" revives your right, and you get to start all over again.
If you still have questions about a right of first offer vs. a right of first refusal, maybe we can help. Check out this short video that will let you know how we review leases with our team of dedicated commercial real estate professionals.