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In the Spotlight: Rights of First Offer
As the competition to clear vacancies escalates in many office leasing markets, more prospective tenants are able to extract concessions that were once only the province of larger users. This article discusses one of those concessions ' the “right of first offer” or “ROFO.”
A ROFO is an expansion right. It gives a tenant a “first look” at leasing other space that becomes “available” during the tenant's lease term before the landlord takes the space to the overall market. Tenants like ROFOs because they provide an opportunity to bid on desirable space before the market can drive up the rent for such space, without requiring that the tenant make an upfront commitment at lease execution. From the landlord's perspective, a ROFO is seen as the least harmful method for a landlord to accommodate a tenant's future expansion needs without overly encumbering its building. Because the ROFO rights are triggered early in the leasing process for the “available” space, the ROFO can be addressed with minimal disruption to overall leasing efforts.
However, a broadly defined ROFO provision can significantly limit the landlord's flexibility in accommodating the needs of the current occupant of the ROFO space, and thus can frustrate a landlord's overall leasing plan for the building. This article focuses on drafting the ROFO provision narrowly in order to preserve this flexibility. As discussed below, the keys are: 1) limiting the number of overall times that a tenant's ROFO is triggered; and 2) narrowly defining what constitutes “available” space for the purpose of triggering the ROFO.
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