Understanding Right of First Refusal in a Commercial Lease

Understanding Right of First Refusal in a Commercial Lease

If you are a tenant trying to navigate the best deal in your commercial lease, you need to understand the right of first refusal and how it could benefit you.  This is particularly important if you know that your company has the potential to grow rapidly.  Being stuck in a property that you have outgrown can be extremely detrimental to your business in the long-term.  A right of first refusal can help to avoid signing off on a long-term lease in a property that may not suit your needs down the line.

How Right of First Refusal Works

Adding a right of first refusal clause to your commercial lease will offer you much more flexibility when it comes to the expansion of your business.  It is an agreement between the landlord and the tenant which is added to the lease to ensure the tenant’s ability to acquire additional space as it becomes available.  The tenant will have an opportunity to wait for available space to be conditionally leased with the right to match whatever offer is made and accepted by the third party.  This makes it much easier for the tenant, who then doesn’t have to do any of the negotiating.  Most landlords will not typically offer this type of clause willingly (primarily because it becomes hard to track, particularly if multiple tenants within a building have the same clause and they must document who is in line first).  For this reason, the tenant is usually the one to request that it be included as a stipulation in the initial contract.

How Likely is Your Landlord to Accept the Clause?

Right of First RefusalYour ability to have a right of first refusal clause added to your commercial lease will depend on a couple of different factors.  First off, you will want to make sure that you have an agent working with you who is well-versed in negotiating commercial leases.  Second, you will need to consider the weight your particular company holds.  The size, durability, and credit-worthiness of your company will be an important component that your landlord will look at.  The state of the current market will likely also be a determining factor, as well as the specifics that you are asking to be included in the clause.  If there are multiple businesses within the building, it may also depend on whether or not your landlord has already entered into one of these agreements with another tenant.  Landlord’s may also be reluctant to agree to this sort of a clause because it can impede on their ability to lease the space as prospective tenants realize that the deal they negotiate could be pulled out from under them.

Tenant Disadvantages

While the benefits of adding a right of first refusal clause to your commercial lease are fairly obvious, there are also some disadvantages to consider.  The terms of this type of clause are pretty inflexible once they are agreed upon, leaving the tenant to match any offers term for term.  For example, if you are an existing tenant with only two or three years left on your lease and a new tenant comes in with an offer for a ten year lease, you will be locked into the ten year term offered by the third party should you choose to take the deal, as well as any other terms proposed.

Considerations for Your Right of First Refusal Clause

If you do decide to add a right of first refusal clause to your commercial lease, it’s important that you are very careful about how your terms are defined, particularly when it comes to timing and expiration of the tenant’s rights.  It should be clearly outlined how long the landlord has to notify you of any offer made on the property, as well as how long you have to either accept or decline the deal as it has been presented to you.  It should also be clearly noted that your right is continuous, and will therefore not be terminated in the event that you decline your option the first time.  This is where working with an experienced commercial real estate agent can be the difference between a deal and a dud.

Negotiating a Commercial Real Estate Lease in Tampa?

As you can see, it’s extremely important to have a clear understanding of the nuances of these types of clauses when entering into a commercial real estate lease.  Signing off blindly can lead to regret down the line.  John Milsaps has spent the past decade successfully negotiating commercial real estate leases that serve the greatest needs of his clients.  As a senior advisor with SVN Florida Advisors, his consistent loyalty, creativity, and commitment to his clients, has continued to ensure success in each of his business transactions.  Take a look through his database of available properties today and contact him to locate the best property for your



About the Author
John Milsaps, a Senior Advisor at SVN Commercial Advisory Group, specializes in landlord and seller representation in Tampa's professional office and healthcare real estate sectors. His expertise in commercial office space makes him a trusted advocate for clients seeking strategic real estate solutions.