Securing the right to additional space within a building can give tenants a strategic advantage and landlords a valuable tool for attracting and retaining the right tenants. But if not structured carefully, two of the most commonly negotiated provisions governing future space opportunities – the right of first offer and the right of first refusal – can create significant and unexpected risks, particularly when combined with an early termination option.
This Practice Spotlight provides a brief, practical overview of both provisions from the landlord's and tenant's perspectives, with particular attention to the compounded risks that arise when these rights intersect with a termination option.
Understanding ROFOs and ROFRs
A right of first offer (ROFO) obligates the landlord to offer available space to the tenant before marketing it to third parties. The tenant then has a defined period to accept or decline the offer on the terms presented. A right of first refusal (ROFR), by contrast, allows the tenant to match or accept the terms of a bona fide third-party offer that the landlord has received for available space.
Both provisions are common in commercial leases, though their enforceability and interpretation can vary by jurisdiction and depend heavily on the specificity of the drafting. In California and many other jurisdictions, courts will generally enforce the plain language of these provisions, making precise drafting the critical safeguard for both parties.
Benefits From the Landlord's Perspective
Landlords benefit from offering ROFOs and ROFRs as leasing incentives that do not require immediate economic concessions. These provisions can help attract and retain high-quality tenants, reduce future vacancy risk, and demonstrate flexibility in lease negotiations. A ROFO in particular preserves the landlord's ability to set initial deal terms and maintain control over the pricing of available space. A ROFR can serve as a useful tool for generating competitive tension in the market, as landlords may solicit third-party offers knowing that the existing tenant's matching right can serve as a floor on deal terms. However, as noted below, ROFRs can have a chilling effect on the market, so landlords favor ROFOs over ROFRs.
Benefits From the Tenant's Perspective
For tenants, ROFOs and ROFRs provide a meaningful opportunity to secure contiguous or proximate space for future growth without committing to that space at the outset of the lease term. A ROFO gives the tenant early visibility into available space and the ability to negotiate before the landlord engages the broader market. A ROFR provides a backstop against losing desirable space to a competitor, allowing the tenant to step into the shoes of a third-party offeror. Both rights can be essential components of a tenant's long-term occupancy and expansion strategy, reducing relocation risk and preserving operational continuity.
Risks From the Landlord's Perspective
The primary risk for landlords is the chilling effect these provisions can have on third-party leasing activity. Prospective tenants may be reluctant to invest time and resources negotiating for space if they know an existing tenant holds a ROFR that could preempt their deal at the last moment. ROFOs can similarly slow the leasing process by requiring the landlord to wait for the existing tenant's response before going to market. From a portfolio management standpoint, these encumbrances can also complicate dispositions, refinancings, and joint venture arrangements, as successors and lenders may view outstanding expansion rights as liabilities.
Risks From the Tenant's Perspective
Tenants should be aware that these rights are not guarantees of additional space. A poorly drafted ROFO may allow the landlord to set initial offering terms at above-market rates, effectively pricing the tenant out. A ROFR, meanwhile, is inherently reactive: it only triggers when a third party has already expressed interest, which may come at an inopportune time or on unfavorable terms the tenant cannot meet. Additionally, both rights are typically personal to the named tenant and may not survive an assignment or subletting without express language to the contrary. Tenants must also be attentive to notice periods, exercise windows, and any subordination provisions that could dilute the practical value of the right.
The Compounded Risk: Early Termination Options Combined with ROFOs and ROFRs
The interaction between an early termination option and a ROFO or ROFR creates complex risks for both parties. From the landlord's perspective, a tenant who holds both the right to terminate a lease early and the right to claim additional space presents a planning dilemma.The landlord may struggle to market the tenant's existing space to prospective replacement tenants while simultaneously being obligated to offer adjacent space to the very tenant who may vacate. This combination gives the tenant maximum optionality at the landlord's expense, potentially freezing a significant portion of the building's leasable area in uncertainty.
From the tenant's perspective, exercising a ROFO or ROFR may extinguish an early termination option entirely. Tenants who anticipate needing additional space should carefully evaluate whether their termination right and expansion right can coexist, or whether exercising one will forfeit the other.
How Harvest Can Help
Whether you are a landlord seeking to protect leasing flexibility or a tenant looking to secure growth options without sacrificing termination rights, the commercial leasing team at Harvest can help. Our attorneys regularly assist clients across California and in multi-state transactions on thoughtful structuring, negotiating, and enforcing of ROFOs, ROFRs, and early termination provisions in ways that align with their broader real estate strategies. Contact us to explore how these rights can work for your next lease.
Commercial leases are about more than rent and square footage. Harvest's commercial leasing team advises landlords, tenants, developers, and investors on all aspects of office, retail, industrial, and life science leasing matters throughout the lease lifecycle. From initial letter of intent negotiations to drafting amendments, assignments, renewals, to dispute resolution and evictions, we help clients navigate the opportunities and challenges that arise in long-term landlord-tenant relationships. Drawing on experience representing institutional landlords across all asset classes and across the country, we provide practical, business-focused counsel that keeps deals moving forward and supports our clients' broader real estate objectives.