When you’re in business, you have to constantly “think ahead to get ahead,” or you’ll find yourself left out. This is never more true than when you’re discussing expansion clauses in a commercial lease.
Expansion clauses can ultimately allow a tenant to grow their business when space becomes available or to obtain ownership of the property where they operate. Two common expansion clauses are a right of first refusal (ROFR) and a right of first offer (ROFO).
How does an ROFR work?
An ROFR can give you, as the tenant, the right to match or decline to match any third-party offer your landlord receives on the property – before your landlord is free to accept that offer. For example, imagine:
- You own a restaurant in a commercial complex with several attached buildings, but you lease the space.
- The landlord gets an offer from another party to rent out an adjacent building.
- Because you have an ROFR, the landlord has to offer you the same deal before they can take the third-party offer.
If you want to buy the building, you might exercise your ROFR and take the deal. If you’re not interested, you can pass it up, and your landlord is free to sell to the other party.
How does an ROFO work?
This gives you the right to make an offer on a property before the owner can sell it to anybody else. For example, say that your landlord decided to get out of the real estate business and wants to sell the property you use for your business. Before they can sell, they have to come to you and offer to let you make a bid on the place before they put it on the open market.
It’s important to understand that the owner is not obligated to accept your bid just because you have an ROFO. If you’re unable to agree on the deal, they can eventually market it elsewhere.
Understanding expansion clauses and how they may benefit you can be tricky. Legal guidance can help.
