Weigh Expansion Options When Negotiating Office Lease

Weigh Expansion Options When Negotiating Office Lease



Having the option to expand within your current office building if you need to can be very valuable. An option to expand could save you time and money by helping you avoid a move to a larger office at a different location. If you think you’ll require extra space in the future, it’s crucial to include in your lease one of two preemptive rights to lease space adjacent to yours for expansion: the right of first refusal or the right of first offer. But be prepared for your owner to carefully negotiate these rights with you because it knows that giving expansion options helps it retain tenants, but could inconvenience it down the road.

Your two expansion options—the right of first refusal and the right of first offer—have pros and cons for tenants. Because every business has different needs, you should carefully consider which one to negotiate for.

Expansion Option #1: Right of First Refusal

A right of first refusal requires the owner to submit to you any lease offer it is willing to accept from a third party for your adjacent space. You then have the right to lease the adjacent space on the same terms and conditions. Only if you reject the offer or fail to respond to it in a timely manner, may your owner lease it to the third party—but only on the same terms.

Expansion Option #2: Right of First Offer

In contrast, the right of first offer requires that before marketing the adjacent space, the owner must give you notice that it is being made available for lease, and offer it to you on the terms set forth in the owner's offer to third parties. You have the right to lease the space pursuant to that offer by giving the owner notice that you will exercise your right.

In most situations, the right of first refusal benefits tenants to a greater degree than the right of first offer. A prospective tenant may be discouraged from negotiating a deal for the adjacent space if an existing tenant may ultimately step in, exercise its rights, and reap the benefits of such negotiations, possibly resulting in a lower rent for it. On the other hand, the owner maintains a relatively strong position under a right of first offer because it may offer the adjacent space to the existing tenant on its own price and terms.

For more tips on how to negotiate a tenant-favorable lease for your growing business, see “Plan for Business Growth with Expansion Options,” available to subscribers here.

 

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