Lease Expansion Strategies: How ROFR and ROFO Impact Your Business
Securing the right commercial space is a critical decision for any business, but ensuring future flexibility is just as important. What happens if your company grows and needs additional space? Without the right lease provisions in place, expansion can become a challenge—leading to disruptions, costly relocations, or missed opportunities.
Two key strategies that can help tenants secure future space are the Right of First Refusal (ROFR) and the Right of First Offer (ROFO). These lease clauses give tenants a competitive advantage when new space becomes available, but they come with both benefits and risks. Understanding how they work, their impact on lease negotiations, and what to watch for can help businesses plan for long-term growth without unnecessary constraints.
What Are ROFR and ROFO?
While both ROFR and ROFO provide expansion rights, they operate differently in practice.
Right of First Refusal (ROFR)
ROFR gives the tenant the option to match any third-party offer that the landlord receives for an adjacent space. If another tenant or outside party expresses interest in leasing that space, the existing tenant with ROFR can either accept the same terms or decline and allow the new tenant to proceed.
This provision ensures that a tenant doesn’t miss out on space that could be crucial for growth, but it can also be reactive in nature—meaning the tenant must wait for another party to trigger the opportunity.
Right of First Offer (ROFO)
ROFO allows a tenant to make the first offer on an available space before the landlord markets it to other tenants. Unlike ROFR, where the tenant must match another offer, ROFO gives tenants a proactive opportunity to negotiate expansion terms before the space reaches the open market.
This approach provides greater control over expansion planning, but landlords are not obligated to accept the tenant’s offer. If the two parties can’t agree on terms, the landlord can proceed with marketing the space to others.
Advantages of ROFR and ROFO for Tenants
Ensures Expansion Without Relocation
Businesses can grow within the same property rather than searching for a new location. This prevents the cost and disruption of moving, maintaining customer accessibility and operational consistency.
Limits Competition for Key Spaces
ROFR and ROFO prevent competitors from immediately securing valuable space, giving the tenant an inside track on expansion opportunities.
Improves Lease Flexibility
Having expansion rights adds flexibility to a lease agreement, allowing tenants to adapt as their business grows without committing to unnecessary space upfront.
Strengthens Negotiating Leverage
Tenants with ROFO can negotiate favorable terms before space is marketed. With ROFR, they gain the ability to prevent being locked out of prime space by another tenant.
Potential Downsides of ROFR and ROFO
Timing May Not Align with Business Needs
ROFR forces tenants to react when a third party expresses interest, which may not align with internal expansion plans. If a business isn’t ready, it may have to pass on the opportunity.
Potential for Higher Costs
With ROFR, the landlord may present terms based on a competitive market offer, which could drive up rental rates. ROFO negotiations can also be unpredictable if the landlord has different expectations on price and lease length.
Uncertain Landlord Cooperation
Some landlords may structure ROFR or ROFO in a way that favors them, limiting how much time tenants have to decide or setting unfavorable financial terms. Poorly defined clauses can lead to disputes.
Limited Market Control
Tenants with ROFO may not always secure the space if they can’t reach an agreement with the landlord, while ROFR requires another party’s interest before the tenant even has an option to act.
How ROFR and ROFO Impact Lease Negotiations
Expansion rights should be clearly outlined in the lease agreement to avoid ambiguity. Tenants should focus on these key factors when negotiating ROFR or ROFO:
Defined Terms and Decision Timelines
Ambiguous wording can lead to disagreements. The lease should specify:
Which spaces are covered under ROFR or ROFO
How much time the tenant has to accept or reject an offer
What happens if the tenant declines (e.g., does the right reset for future opportunities?)
Fair Market Rent vs. Third-Party Offers
ROFR clauses should define whether the tenant must match any offer or only a "bona fide" offer. Similarly, ROFO should outline how rent will be determined—whether it's based on market rates or a formula agreed upon in advance.
Arbitration in Case of Disputes
If the tenant and landlord cannot agree on lease terms, a dispute resolution process should be in place. Arbitration clauses can prevent prolonged legal battles and ensure that expansion rights remain enforceable.
Making the Right Choice: ROFR vs. ROFO
When ROFR Is the Better Option
ROFR works well for tenants who are not in immediate need of expansion but want to protect future opportunities. This is ideal for businesses in competitive real estate markets where space is limited, and securing additional square footage at the right time is crucial.
When ROFO Is the Better Option
ROFO is better for businesses that expect to expand soon and want proactive control over negotiations. It allows for early planning and greater control over lease terms, making it ideal for tenants who anticipate growth but don’t want to be forced into competitive bidding.
When to Include Both
Some tenants negotiate both ROFR and ROFO to maximize flexibility. In this case, they get first access to available space (ROFO) and retain the right to match other offers if they decline initially (ROFR). This combination provides the most control but requires careful lease structuring.
Securing future expansion rights through ROFR or ROFO can be a smart move for businesses that want long-term stability and flexibility in their commercial lease. However, these clauses must be clearly defined to prevent disputes and ensure the terms align with the tenant’s business strategy.
Landlords will often include ROFR and ROFO clauses in a way that favors them, so businesses should negotiate carefully—considering rent structures, response times, and dispute resolution mechanisms. Working with a commercial real estate advisor or broker can help tenants navigate these negotiations and ensure their lease supports their long-term growth objectives.
For businesses planning to expand, locking in the right lease provisions now can prevent costly relocations, competitive lease battles, and missed opportunities in the future.
Ready to future-proof your lease?
Whether you're planning for growth or simply want more flexibility, understanding and negotiating ROFR and ROFO provisions can make all the difference. Connect with our team today to review your lease strategy, explore upcoming opportunities, and secure your business's space to grow. Let’s make sure your next move is on your terms.
