Right of First Refusal in the Commercial Lease Agreement

You have selected a commercial space for your business and you are ready to enter into a lease agreement. At the current time, the space may be the perfect size but what about future?  Are you planning for growth?  What about room for additional products or equipment?  Have you thought about future hiring needs? As you are contemplating these types of decisions, you might also consider whether or not it would be beneficial to negotiate the right of first refusal (ROFR) on additional space in the building into your lease terms.

What is the Right of First Refusal and What Does This Mean for Commercial Tenants?

Let’s use the following example. A neighboring commercial space becomes available and the landlord decides to list the property for lease,  if the tenant has ROFR, the landlord is required to present the offer to the tenant first and establish a set period of time to accept or decline the space. If the tenant accepts the deal, they take on the same rates and terms that were negotiated by the other party. The tenant is not obligated to take the available space, it is a negotiated option within their lease agreement.

ROFR allows commercial tenants the first opportunity to expand into neighboring spaces. The term neighboring spaces could refer to adjacent spaces, non-adjacent spaces or a combination of both. ROFR appeals to commercial tenants because the option rights to additional space sets them up for future growth of their business while giving them the ability to stay in their current location. Without the ROFR, a growing tenant’s only option to expand may be to relocate their company. If your business is located in a popular area where lease space is hard to come by, it helps to have options.

If the tenant negotiated an ongoing ROFR, it helps them to secure a long-term deal and the chance to re-negotiate without going through the process of negotiation. In cases where a third-party negotiates with the landlord about a lease agreement, the tenant can actually refuse the third-party offer and accept the negotiated lease for themselves.

Finally, the ROFR clause gives the tenant some leverage ability in the commercial lease agreement where they might otherwise perceive they are the underdog in the tenant-landlord relationship.

Negotiating the right of first refusal can be extremely complicated. Reach out to one of our commercial real estate listing agents to help you find commercial real estate property for sale or lease in the Cedar Rapids Metro area and to assist in negotiating terms that make sense for your business operations.

To read more on Right of First Refusal in the Commercial Lease Agreement, check out this article from Austin Tenant Advisors.