By Jones Osborn II

A right of first refusal is often requested by tenants when leasing space because they want the right to take any additional space that becomes available. Most businesses expect to grow, but at the same time are often hesitant to commit to more space than they need because of the cost and difficulty of predicting future space needs. A right of first refusal can be a useful method of accommodating the tenant's uncertain need for additional space in the future without causing undue inconvenience for the landlord.

It is not unusual for a landlord to verbally agree to give the tenant the first right to lease certain additional space. However, when the actual lease document is presented, the tenant may not get exactly what it expected.

Sometimes, a landlord will present the tenant with a provision that is more accurately called a "right of first offer." This is not the same thing as a "right of first refusal."

First Refusal. A typical right of first refusal will give the tenant the right to match any lease of additional space that the landlord intends to enter into with a third party. The landlord is required to inform the tenant of the proposed lease, and the tenant then has a specified period of time to enter into a lease of the same space on the same terms and conditions.

First Offer. However, some landlords are reluctant to enter into an agreement of this type because it is a somewhat cumbersome procedure and they fear it may discourage potential tenants. Consequently, it is not unusual for the landlord to include a right of first offer in the lease, instead of a right of first refusal. A right of first offer typically requires the landlord to offer any additional space to the tenant at a rent set by the landlord before placing it on the market. The tenant then has a specified period of time to lease the space, and if the tenant does not exercise its right to lease the landlord is completely free to lease it to third parties at whatever rent and on whatever terms it desires. Notice that it is not necessary for the landlord to have an offer from an actual third party tenant at the time it makes the offer, nor is the landlord required to offer the space at market rate.

Disadvantage of Right of First Offer. Clearly, this is not as advantageous for the tenant because the price and terms offered by the landlord may not be at market, and because it is a single opportunity to lease which might be activated at a time when the tenant does not yet need the space.

Essential Terms. A tenant who wants the advantages of a true right of first refusal should clearly specify what is wanted during the negotiation phase, and should carefully read what is offered and negotiate the most favorable provisions possible. A good tenant-oriented right of first refusal should contain at least the following terms:

1. The landlord should be required to offer the space to the tenant on the same terms and conditions offered to an actual third party prospective tenant, and should be required to disclose the name of the prospective tenant and to furnish a copy of the proposed lease.

2. The tenant should have a reasonable period of time to accept or reject the offer.

3. If the terms are changed after being shown to the existing tenant, the existing tenant should have the opportunity take the space on the new terms.

4. The landlord should have a specified period of time to consummate the lease to the third party.

5. If the landlord does not consummate the lease to the third party within a specified period of time, the tenant's right of first refusal should be reinstated.

Conclusion. A tenant desiring a right of first refusal should make it clear exactly what it wants at the outset, and should carefully review the language of the lease to make sure that the provision meets its needs and furnishes a meaningful right to expand at market rates if and when space becomes available.