Right of First Refusal When Leasing Commercial Real Estate

right of first refusal commercial leaseIf your company expects to grow rapidly by hiring additional employees sooner than later you want to try negotiate a right of first refusal (ROFR) on any additional space in the building. This could be any contiguous space, non-contiguous space, both or a combination of.

Whether you are leasing office, retail, or warehouse space if you expect rapid growth then you must do your best to secure the option rights to additional space. Otherwise your only option will be to relocate your company. For example, in a hot area like the Austin commercial real estate rental market space is tight so it's important to create more options for your company.

What is a Right of First Refusal?

A right of first refusal is a negotiated right of a tenant in a commercial lease to match any offer received by a landlord to lease a demised or other premises. Basically on any space that you have a ROFR on the landlord has to give you first dibs on any pre-negotiated deal with another party. You are not obligated to take the space. It's your option.

Ideally you want to get a right of first refusal on any adjacent or contiguous space however that depends on what the neighboring tenants negotiated in their lease. If the contiguous space is not possible then you want to get a ROFR on any non-contiguous space which is space not adjacent to yours. It could be on the same floor or different floors. If another tenant already has a ROFR then you could get a ROFR that is secondary to theirs.

How a Right of First Refusal Works in a Commercial Real Estate Lease

Let's say you are negotiating on 5,000 sf of Austin office space for rent in a particular building and you don't quite know your future office space needs. To increase your chances of having more space in the building to grow into you ask for a right of first refusal. 

The landlord is still able to market any available space they have in the building. However if the landlord gets an offer from another potential tenant that they are willing to accept the landlord has to present the offer to your first, giving you the opportunity to accept or decline the space. 

If you accept the deal then you have to take the same rates and terms that were negotiated by the other party. If you negotiated an ongoing ROFR then you will be able to exercise a right of first refusal again in the future after that party's lease expires.

Example of a Negotiated Right of First Refusal in a Commercial Lease

If Landlord receives a bona fide offer from a third party (including the then-current tenant or occupant therein) (a “Third Party Offer”) to lease any of the 14,209 rentable square feet of space on the 1st floor of the Building, or any of the 6,978 rentable square feet of space on the 2nd floor of the Building, in each case designated on Exhibit A hereto (the 1st floor space and 2nd floor space being, collectively, the “Refusal Space”), and Landlord is willing to accept the terms of such Third Party Offer, Landlord shall offer to lease to Tenant the Refusal Space on the same terms and conditions as the Third Party Offer; such offer shall (a) be in writing, (b) specify the part of the Refusal Space being offered to Tenant hereunder (the “Designated Refusal Space”), (c) specify the rent to be paid for the Designated Refusal Space, and (d) contain the basic terms and conditions of the Third Party Offer and the date on which the Designated Refusal Space shall be included in the Premises (the “Refusal Notice”). Landlord and Tenant hereby agree that: (i) if the Third Party Offer is for less than all of the Refusal Space located on the 1st floor, Tenant must exercise its right hereunder as to all of the Refusal Space on the 1st floor (not just that portion subject to the Third Party Offer) and otherwise on the terms and conditions of the Third Party Offer, (ii) Landlord may not accept any Third Party Offer for any portion of the Refusal Space located on the 1st floor prior to March 1, 2012, and (iii) Landlord will not require Tenant to respond to a Refusal Notice for any Refusal Space on the 1st floor prior to March 1, 2012. Nothing in the previous sentence shall pertain to the Refusal Space located on the 2nd floor of the Building.

The Refusal Notice shall be substantially similar to the Refusal Notice attached to this Exhibit. Tenant shall notify Landlord in writing whether Tenant elects to lease the Designated Refusal Space subject to the Third Party Offer on the same terms and conditions as the Third Party Offer in the Refusal Notice, within five days after Landlord delivers to Tenant the Refusal Notice. If Tenant timely elects to lease the Designated Refusal Space within such five-day period, Landlord and Tenant shall execute an amendment to this Lease, effective as of the date the Designated Refusal Space is to be included in the Premises, on the same terms as this Lease except (1) the Basic Rent and parking charges shall be the amounts specified in the Refusal Notice, (2) the term for the Designated Refusal Space shall be that specified in the Refusal Notice, (3) Tenant shall lease the Designated Refusal Space in an “AS IS” condition, (4) Landlord shall not be required to perform any work therein, (5) Landlord shall not provide to Tenant any allowances other than those contained in the Third Party Offer (e.g., moving allowance, construction allowance, and the like) if any, and (6) other terms set forth in the Lease which are inconsistent with the terms of the Refusal Notice shall be modified accordingly.

If Tenant is unable to exercise its right hereunder with respect to the Designated Refusal Space, such right shall lapse, with respect to the exercise thereof (it being understood Tenant’s right hereunder is a one-time right only as to each Designated Refusal Space the first time it is offered to Tenant hereunder), and Landlord may lease all or a portion of the Designated Refusal Space to third parties on such terms as Landlord may elect. Landlord shall not be obligated to re-offer the Designated Refusal Space to Tenant unless Tenant does not accept the Refusal Notice and Landlord fails to enter into a Lease Agreement with respect to the Designated Refusal Space within 180 days after the date of the Refusal Notice. 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 costs, expenses, 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 under this Exhibit are personal to Tenant and shall terminate, at Landlord’s option, (i) if this Lease or Tenant’s right to possession of any of the Premises is terminated, (ii) if Tenant assigns its interest in this Lease or sublets more than 20% of the Premises, (iii) if 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) on June 30, 2012.

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 refusal or as of the effective date of the addition of the Designated Refusal 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.

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