What's the most important component of a lease? New-to-the-industry professionals usually say, "rent." Experienced professionals often say, "options."
----- What is an option? -----
An option is one party's exclusive right to do something. e.g., terminate, downsize, expand, sell a certain type of good, etc.
----- Expansion options -----
Let's dive into the most common expansion options...
A right of first offer (ROFO) gives the right holder an exclusive right to make the first bid. In a lease, this typically means an existing tenant gets a right to expand when space becomes available.
A right of first refusal (ROFR) gives the right holder an exclusive right to match another party's bid. In a lease, this typically means an existing tenant gets a right to expand immediately before a third party came in and took the ROFR space.
----- Questions and complications -----
1. If you're a tenant, what does a ROFO actually get you? The right to negotiate with the landlord? Do you get to apply your existing economics or are they simply at market terms?
2. With respect to a ROFO, is there a big difference between having a one-time ROFO and an ongoing ROFO? [Yes] Does an ongoing ROFO become a big headache for landlords to manage? [Yes]
3. With respect to a ROFR, does the tenant need to match all terms or just the lease economics? [If the landlord has more leverage at the time the ROFR is negotiated, yes.] If a tenant is five years into a lease and has a ROFR expansion right, then wants to match a third-party's offer to lease for ten years does the tenant have two leases with different lease terms?
4. Can landlords give multiple priority rights to multiple tenants? [Yes, but tenants typically want to know about all the other rights and they generally don't like being layered.]
5. What's the worst thing a landlord leasing agent can do? Grant conflicting options to tenants or miss an option while leasing space. ...definitely a fireable offense.
As you can see, the devil is in the details when it comes to these options.
----- ROFOs vs. ROFRs -----
Here's a question for some of our leasing friends...
What do you prefer for your clients: ROFOs or ROFRs?
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