ARTICLE
15 September 2023

Commercial Lease Options For Tenant Protection: Part 1

KL
KI Legal

Contributor

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services fall under three broad-based practice group areas: Transactions, Litigation, and General Counsel. Its extensive client base is primarily made up of restaurant and hospitality owners and operators, real estate developers and family offices, and lending institutions and investment funds.
One of the major concerns a developing company has when leasing space is that they may outgrow the space. As a company grows, they will likely need more employees, inventory, and storage space.
United States Real Estate and Construction
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One of the major concerns a developing company has when leasing space is that they may outgrow the space. As a company grows, they will likely need more employees, inventory, and storage space. A space that once looked big can quickly become not big enough. Unfortunately for these companies, landlords don't usually grant a tenant a blanket right to terminate their lease just because the company is growing. With that said, there are a few ways for growing tenants to (somewhat) protect themselves so that, when the time comes and they need more space, they can hopefully lease space within the same building in which they are located in. These protections often come in the form of negotiating certain options in a lease.

Right of First Refusal:

What is a right of first refusal? A right of first refusal, or "ROFR," is one way in which a tenant can ensure that, if there is open space in the building in which they currently have a lease, the landlord will need to offer the tenant that open space before the landlord signs a lease with a new tenant. The mechanics of the ROFR are as follows:

  1. The landlord works out a deal for open space with a potential tenant.
  2. Once the terms are finalized, the landlord must go to the tenant that has a ROFR in its lease and offer the tenant the same exact terms for the open space as was negotiated with the potential tenant.
  3. If the current tenant is in need of space, then the current tenant can accept the terms and expand.

This ROFR ensures that the tenant will at least have the opportunity to lease more space in the building that it's in, saving the tenant various costs – such as needing to break its lease as well as move to a new space.

Right of First Offer:

What is a right of first offer? A right of first offer, or "ROFO," is another way in which a growing tenant can protect itself – to a certain degree. Like a ROFR, a ROFO ensures that the existing tenant is offered open space in a building before a landlord can move forward and sign a lease with a new tenant. Unlike a ROFR, where the landlord only brings lease terms to an existing tenant after the terms have already been negotiated, the landlord has to negotiate in good faith with the existing tenant prior to the landlord approaching a potential new tenant for the open space with a ROFO; this can be very advantageous for an existing tenant because, unlike a ROFR where the existing tenant may be stuck with some unfavorable terms, the existing tenant has some sort of power in negotiating terms that work for it with a ROFO.

Many landlords are reluctant to grant tenants ROFRs and/or ROFOs because it will impede the landlord's ability to lease out space in the future. However, if a growing tenant is enticing enough, it may very well be in the landlord's best interest to grant one of these two options to ensure that the landlord has a strong tenant in its property for years to come.

These are just a few examples that demonstrate the importance of properly negotiating for a tenant's future needs. As can be clearly seen from the above, it is important to make sure to have proper representation when negotiating your lease.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
15 September 2023

Commercial Lease Options For Tenant Protection: Part 1

United States Real Estate and Construction

Contributor

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services fall under three broad-based practice group areas: Transactions, Litigation, and General Counsel. Its extensive client base is primarily made up of restaurant and hospitality owners and operators, real estate developers and family offices, and lending institutions and investment funds.
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