When leasing commercial real estate for a rapidly growing company it's important that you negotiate to have options to expand, otherwise if you run out of space in that building your only option is to relocate your company to a different building. One of those options is called a Right of First Offer (ROFO).
What is a Right of First Offer?
If you have negotiated a ROFO then anytime a space becomes available the landlord has to “offer” it to you first. This gives you the ability to take the space or reject it before the landlord offers the space to anyone else. A ROFO could include only adjacent space, any space on your existing floor, or any space in the building.
How Does A Right of First Offer Work?
Let's say you negotiated a commercial lease and the landlord conceded and gave you a ROFO. Then 6 months later a tenant who occupied space on the 5th floor moves out of the building. If you have a ROFO on that space or the 5th floor then the landlord has to offer you the space before offering it to anyone else. ROFO's can be negotiated for a particular floor or space. The key is to understand your current and future space needs and do your best to negotiate rights to space so you have other expansion options other than having to relocate your business elsewhere.
Example of a Right of First Offer in a Commercial Lease
Landlord shall, prior to offering any of the space on the 2nd floor of the Building containing 31,211 rentable square feet and described as the “Offer Space” on Exhibit A (the “Offer Space”) to any party (including the then-current tenant or occupant therein), first offer to lease to Tenant the Offer Space in an “AS IS” condition; such offer shall (a) be in writing, (b) subject to the immediately following sentence, specify the part of the Offer Space being offered to Tenant hereunder (the “Designated Offer Space”), and (c) specify the lease terms for the Designated Offer Space, including the rent to be paid for the Designated Offer Space and the date on which the Designated Offer Space shall be included in the Premises (the “Offer Notice”). Landlord shall only be required to offer, and Tenant may only request to lease, one of the following three options: (a) the entire 2nd floor (31,211 rentable square feet); (b) 24,233 rentable square feet, depicted in Exhibit A as the “DHI Mortgage” space, or (c) 6,978 rentable square feet, depicted in Exhibit A as “Vacant”. However, if Landlord leases any portion of the 2nd floor, the options contained in the previous sentence shall be revised to be the unleased portion of the relevant space, e.g., if Landlord leases 10,000 of the 24,233 rentable square feet in clause (b), then clause (b) shall be deemed to include only the 14,233 rentable square feet remaining in that section of space. The Offer Notice shall be substantially similar to the Offer Notice attached to this Exhibit. Tenant shall notify Landlord in writing whether Tenant elects to lease the entire Designated Offer Space on the terms set forth in the Offer Notice, within five days after Landlord delivers to Tenant the Offer Notice. If Tenant timely elects to lease the Designated Offer Space, then Landlord and Tenant shall execute an amendment to this Lease, effective as of the date the Designated Offer Space is to be included in the Premises, on the terms set forth in the Offer Notice and, to the extent not inconsistent with the Offer Notice terms, the terms of this Lease; however, Tenant shall accept the Designated Offer Space in an “AS IS” condition and Landlord shall not provide to Tenant any allowances (e.g., moving allowance, construction allowance, and the like) or other tenant inducements except as specifically provided in the Offer Notice.
If Tenant fails or is unable to timely exercise its right hereunder with respect to the Designated Offer Space, then such right shall lapse, time being of the essence with respect to the exercise thereof, and Landlord may lease all or a portion of the Designated Offer Space to third parties on such terms as Landlord may elect. Landlord shall not be obligated to re-offer the Designated Offer Space to Tenant unless Tenant does not accept the Offer Notice and Landlord fails to enter into a Lease Agreement with respect to the Designated Offer Space within 180 days after the date of the Offer Notice. Tenant’s rights under this Exhibit shall expire as to any portion of the Offer Space that becomes subject to a new lease following the Lease Date. Unless otherwise agreed in writing by Landlord and Tenant’s real estate broker, in no event shall Landlord be obligated to pay a commission with respect to any space leased by Tenant under this Exhibit, and Tenant and Landlord shall each indemnify the other against all expenses, costs, attorneys’ fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party.
Tenant’s rights are personal to TENANT and shall terminate, at Landlord’s option, if (i) this Lease is terminated, (ii) Tenant assigns its interest in this Lease or sublets more than 20% of the Premises, (iii) Tenant ceases to lease the entire Premises demised as of the Lease Date from Landlord and to occupy at least 80% of the Premises, or (iv) less than 15 full calendar month remains in the Term of this Lease (unless, concurrently with exercising its right, Tenant also irrevocably exercises its renewal right, in which event Tenant’s rights under this Exhibit shall terminate at the expiration of the initial Term).
In addition, it shall be a condition to the effectiveness of the exercise by Tenant of its rights hereunder that, at the time of exercise of the right of first offer or as of the effective date of the addition of the Designated Offer Space to the Premises, (x) there is no existing Event of Default by Tenant, and (y) Tenant satisfies the Net Worth/Credit Threshold, unless Tenant provides to Landlord additional security (either in the form of a security deposit or a letter of credit) in an amount reasonably acceptable to Landlord.