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Granting Expansion Options to Tenants

BY Matthew B. Mattingly
September 24, 2013

Flexibility is an important consideration for tenants when approaching a commercial lease. That has likely never been more true than it is in today's market, as tenants have one eye on a prosperous future, but still have the sting of the recent economic downturn fresh in their minds. One way that tenants seek that flexibility is through expansion rights. Whether in the form of pure expansion rights, rights of first offer or rights of first refusal, such rights can provide an enticing incentive for tenants who desire long-term flexibility, but either cannot predict the amount of space they will need long term, or cannot commit to that much space at the time of lease execution. When properly drafted, such expansion rights should not be a significant detriment to the landlord, making them the perfect incentive for both sides. Nonetheless, a prudent landlord must consider a number of factors when granting expansion rights to a tenant.

Type of Right

The first consideration is simply the type of right that will be granted. These can come in many forms. However, this article places them in three basic categories: 1) pure expansion rights; 2) rights of first offer; and 3) rights of first refusal. A pure expansion right means that a tenant has the right, either on a set date or for a given period of time, to expand into additional space. Rights of first offer require the landlord to provide notice to the tenant when certain space comes available or is to be marketed. Rights of first refusal require the landlord to provide notice to the tenant when the landlord has received a bona fide third-party offer for space that it intends to accept, and then allow the tenant a period of time to match that offer. (See “In the Spotlight,” infra.)

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