I met with a client today who’s business has continually expanded over the last 10 years. They have been smart and deliberate about planning for expansion. Each time they have leased space and/or expanded they have been able to negotiate (in order of preference) a Right of First Offer (ROFO), Right of First Refusal (ROFR) or a straight option to expand with the rental rate and TI allowance pre-negotiated. Each of these tools is beneficial to an expanding tenant and can be detrimental to a landlords leasing ability. The form and substance of each right is different and can be written in a multitude of ways.
“Even superior rights can be worthless”
Many times, in a popular project, and when the economy is on the upswing, tenants will be growing in the same building and be competing for space. Some tenants ROFO’s and ROFR’s may be superior to the other tenants. But in every instance the circumstances are different and even “superior” rights can be worthless if not written properly. Legally this is an obvious statement, but that’s not what I am getting at… For rights to be meaningful all potential expansion scenarios (including other tenants in the building) must be well thought and customized to the expansion strategy before the lawyers get involved. Only then can their drafting expertise be fully utilized.
“Vacant space is key”
But after the rights are all negotiated, reality will hit, circumstances will have changed, expansion will be imminent, and the most important need emerges… A building that has vacant space and a landlord that understands the importance of delivering that space, and additional future rights of expansion.
Hopefully a tenant isn’t pressed to expand early under the sometimes false pretenses of a ROFO notice, or held up due to a few ROFR or option legalities. The best landlords understand that growing tenants are their best asset and treat them as such.