At the heart of most commercial property there exists a lease. Landlords secure rent through a lease, Tenants secure space for their business through a lease and commercial property investments are underwritten by the terms of the lease or leases that are in place.
While most commercial leases will be drafted on a “Standard Form” there is no set standard and that form will vary from building to building. It is important to realize that most of the terms contained in a commercial property lease are negotiable. Price Edwards and Company has negotiated tens of thousands of leases in its company’s history. Whether you are a landlord looking for an advisor to limit your exposure to harmful lease clauses, a Tenant looking to tailor a lease to fit the specific needs of your operation, or an investor needing an advisor to abstract the leases making up an investment and point out any potential opportunities or pitfalls within those leases, Price Edwards & Company has a team of knowledgeable advisors able to assist you.
Below is a part of a series of articles that is meant to give a broad overview of some common, and not so common, clauses contained in a lease. Each article will provide the general purpose of the clause, whether the clause is considered a standard part of a landlord’s lease form, and the reasoning as to why a clause would be negotiated for or against from both the tenant and landlord’s perspective, and some examples of the lease clause. If you have any questions please reach out to me at firstname.lastname@example.org.
Space Expansion Options
Purpose: To secure, or have the option to secure, more space than what is originally leased at some future point in the term of the lease.
Not a Standard Lease Clause: Expansion Options will not typically appear in a standard lease form.
Tenant’s perspective: As a Tenant I could be entering into longer lease term that leaves some uncertainty of whether or not the space I lease today will accommodate my needs in the future. An expansion option allows some protection against this uncertainty. It allows some flexibility to pay for the space I need today and provide some opportunity in the future to add on to my space if/when needed.
Landlord’s perspective: As a Landlord I do not want to encumber any space that I may elect to market for lease. If I do provide a tenant with an expansion option, I want to limit the adverse effect it could have on marketing space to prospective tenants.
The following are examples of different expansion options listed from most to least favorable from the Tenant’s perspective.
Option to Expand: The Option to Expand is an option that reserves expansion space for your future use. If you determine you need additional space, you will provide notice to the landlord that you desire the additional space and the landlord must perform. Terms such as rental rate and improvement allowance for this additional space are usually determined in advance as part of the lease agreement. The landlord will try to soften this option by putting time parameters around when the you can elect to exercise this right. As an example, if you have signed a five-year lease and are requesting an Option to Expand the landlord may only allow for this option to be exercised in the first two years of the lease. This would result in the landlord being unable to market the expansion space for the first two years to any prospective tenants.
Right of First Refusal: Unlike the Option to Expand, The Right of Frist Refusal is an option for expansion space that is triggered by the interest of a third-party. The Right of First Refusal does not limit the landlord’s ability to market the expansion space to prospective tenants. However, if/when a prospective tenant and the landlord have agreed to terms for the space the landlord must provide these same terms to you before leasing the space to the third-party. You will have a period of time in which you must elect to expand your space on these same terms or choose not to exercise your Right of First Refusal. The landlord will limit his exposure by requiring you to take all, not a portion, of the expansion space, and shortening the time you have to respond. The landlord will also negotiate for this option to be a one-time right. Meaning if the landlord presents you with a third-party offer for the space and you elect not to exercise your Right of First Refusal, then if the third-party deal never materializes or if the expansion space becomes vacant again at some point in your lease term you have no further rights encumbering that space.
Right of First Offer: The Right of First Offer, sometimes referred to as a “ROFO”, is the least encumbering of expansion rights from the landlord’s perspective. You may bargain for a Right of First Offer if you would like the option to lease additional space that is contiguous to yours that is currently leased by another tenant or for some other reason deemed unavailable. The Right of First Offer requires the Landlord to give you notice if/when the space becomes available and present you with commercially reasonable terms to lease the space. You will have a period of time to respond with your election to lease the additional space or forgo your Right of First Offer. Similar to the Right of First Refusal, the landlord will negotiate to make this a one-time right, make it for all of the space, and shorten your response time. If you elect not to exercise your Right of First Offer the landlord may proceed with marketing the space unencumbered.