Right Of First Offer, Right Of First Refusal and Termination Options
This post is the seventh in our series entitled “The ABCs of Commercial Real Estate Leases”. The series is a primer for those who are new to commercial real estate and looking to learn more about leases, or a helpful and reliable resource for anyone searching for information on a specific lease-related topic. This post is the last on the topic of Options and it addresses Right of First Offer, Right Of First Refusal and Termination Options. In previous posts in the series, we covered:
- Lease Basics
- Gross and Net Leases
- Operating Expense Inclusions and Exclusions
- Contraction, Reduction and Expansion Options
- Purchase and Relocation Options
- Extension and Renewal Options.
Just click on any of the links above to read the post.
Right Of First Refusal, Explained
A Right of First Refusal—often abbreviated as “ROFR”– is the right of the tenant to match the terms of a proposed contract before the contract is executed. The key feature of a ROFR is the existence of a Third-Party Offer.
Example of A Right Of First Refusal
To help you spot a Right Of First Refusal Option and give you an idea of the type of language typically found in them, here’s an example from an actual lease:
(ROFR): XXXIV. Right of First Refusal to Lease. Landlord agrees, subject to existing tenants’ prior rights, which rights are identified on Schedule II attached hereto, that if, at anytime during the Term of this Lease and any extension thereof, pursuant to the terms of Article XXXV hereof, Landlord receives a written offer to lease any space on the eighth (8th) floor of the Building which is contiguous to the Premises (“Refusal Space”), Tenant shall have the first right and option to lease the Refusal Space on the following terms and conditions:
If Landlord at any time during the Term obtains a bona fide offer in the form of a letter of intent (“Offer”) to lease the Refusal Space from any third party, Landlord shall submit such offer to Tenant and Tenant shall have the right, within ten (10) Business Days after receipt of the offer, to lease the Refusal Space on the same terms and conditions as set forth in the Offer. If Tenant does not give Landlord notice in writing within said ten (10) Business Day period that Tenant intends to exercise its rights hereunder, then Landlord shall be free to lease the Refusal Space on the terms and conditions set forth in the Offer submitted to Tenant and in such event Tenant’s rights hereunder with respect to such Offer (but not with respect to any other Refusal Space or other Offer) shall terminate; provided, however, that in the event such lease shall not be consummated, then Tenant’s rights hereunder, which shall be continuous and ongoing, shall be reinstated as to subsequent bona fide Offers. Tenant’s Right of First Refusal must be exercised as to one hundred percent (100%) of the Refusal Space that is the subject of the Offer upon the terms set forth in Landlord’s notice. If Tenant does not notify Landlord of its election to exercise its Right of First Refusal with respect to the Refusal Space that is the subject of the Offer within said ten (10) Business Day period, then, in such case, Tenant shall be deemed to have elected not to exercise its Right of First Refusal with respect to the Refusal Space in question and shall be deemed to have waived its Right of First Refusal with respect to such Refusal Space for the term of any lease entered into by Landlord pursuant to the Offer. If Tenant elects to exercise its Right of First Refusal and so notifies Landlord of same within the aforesaid time periods, then, in such case, Tenant shall lease the Refusal Space as of the availability date set forth in Landlord’s notice on the same terms and conditions contained in the Offer, (i) the term “Premises” for all purposes of the Lease shall include the Refusal Space, and (ii) the numerator of Tenant’s Pro Rata Share shall increase by the amount of the rentable area contained within the Refusal Space.
Right Of First Offer, Explained
Right of First Offer– often abbreviated as “ROFO”—is the right providing the tenant the first option of leasing a particular available space before the landlord offers it to 3rd parties.
Example of A Right Of First Offer
Here’s an example of a typical Right Of First Offer Option, taken right from an actual lease so you can see how they’re structured and what provisions are usually included:
ROFO: 2. Right of First Offer A. Grant of Option; Conditions. Tenant shall have the one time right of first offer (the “Right of First Offer”) with respect to the 1,082 rentable square feet known as Suite No. 287 on the 2nd floor of the Building shown on the demising plan attached hereto as Exhibit F‐1 (the “Offering Space”). Tenant’s Right of First Offer shall be exercised as follows: at any time after Landlord has determined that the existing tenant in the Offering Space will not extend or renew the term of its lease for the Offering Space (but prior to leasing such Offering Space to a party other than the existing tenant), Landlord shall advise Tenant (the “Advice”) of the terms under which Landlord is prepared to lease the Offering Space to Tenant for the remainder of the Term, which terms shall reflect the Prevailing Market (hereinafter defined) rate for such Offering Space as reasonably determined by Landlord. Tenant may lease such Offering Space in its entirety only, under such terms, by delivering such written notice of exercise to Landlord (the “Notice of Exercise”) within 5 days after the date of the Advice, except that Tenant shall have no such Right of First Offer and Landlord need not provide Tenant with an Advice, if: (1) Tenant is in default under the Lease beyond any applicable cure periods; (2) the Premises, or any portion thereof, is sublet; (3) the Lease has been assigned; (4) Tenant is not occupying the Premises; (5) the Offering Space is not intended for the exclusive use of Tenant during the Term; or (6) the existing tenant in the Offering Space is interested in extending or renewing its lease for the Offering Space or entering into a new lease for such Offering Space.
What To Look For
Referencing the two examples above, here is some of the important information to look for in either a Right Of First Offer or Right Of First Refusal Option:
- ROFR: Landlord to notify Tenant if it receives a bona fide offer; Tenant to exercise within 10 Business Days after receipt of Landlord’s offer.
- ROFO: Landlord to notify Tenant if existing tenant is not extending or leasing Offering Space and shall offer such space to Tenant; Tenant to exercise within 5 days after the date of the Advice.
- ROFR: As of the availability date set forth in Landlord’s notice
- ROFO: Silent
Is it a one‐time right, or does it continue?
- ROFR: If Tenant does not exercise within the required timeframe, Landlord may lease space under the terms set forth in the offer and Tenant’s rights shall terminate. If the lease does not consummate, Tenant’s right shall be restated as to subsequent bona fide offers.
- ROFO: While the lease says “one‐time” in the first sentence, there is no clarification of this, so, it is safer to assume it is a continuing right.
What is the rent for the option space?
- ROFR: Same rate as the bona fide offer received by Landlord.
- ROFO: Prevailing Market
What/where is the encumbered option space:
- ROFR: Any space on the 8th floor contiguous to the Premises.
- ROFO: 1,082 rentable sq. ft., Suite No. 287 of the Building.
Are the option and encumbered space subject to other rights to other tenants?
- ROFR: Subject to existing tenants’ prior rights.
- ROFO: Subject to rights of existing tenant.
Does exercising the option impact tenant’s other option rights?
- ROFR: Cannot tell.
- ROFO: Cannot tell.
If tenant exercises its ROFO/ROFR and the space becomes part of tenant’s premises at a certain date, is tenant required to exercise a renewal option?
- ROFR: No.
- ROFO: No.
- ROFR: Right must be exercised as to all 100% of the Refusal Space that is the subject of the offer.
- ROFO: Landlord not required to provide Advice if Tenant is: in default, has sublet or assigned, is not occupying Premises or if Offering Space will not be used for exclusive use of Tenant.
Termination Options, Explained
A Termination Option is an option granted to either the landlord or tenant to end the term of a lease prior to the scheduled Expiration Date. In some terminations, the lease requires the terminating party to pay a fee for the right to cancel. A rolling termination refers to an option to end the lease that has no fixed effective date. In such a case, the date that the terminating party gives notice determines the effective date (usually a specified number of days/months after notice).
An Example of A Termination Option
Termination Option. 7.1 Tenant shall have and is hereby granted the continuing option to terminate the Lease effective on or after October 1, 2025 as though the date of such termination were the Termination Date set forth in the Lease, but only by complying strictly with the following conditions: (a) Tenant shall deliver written notice (“Tenant’s Exercise Notice”) (which notice must specify the termination date [such date, the “Early Termination Date”]) exercising such option no later than six (6) full calendar months prior to the Early Termination Date; (b) such notice shall include a certified or cashier’s check payable to Landlord in the amount of one‐half (1/2) (the “First Cancellation Payment”) of the sum of (i) one (1) month of current gross rent for the Premises, plus (ii) the unamortized Landlord Premises 41 Contribution (defined in Section 9.5 below) actually utilized by Tenant at 10% interest spread over a 36 month term, as a cancellation fee and not as liquidated damages or a penalty, (c) on or before the Early Termination Date Tenant shall deliver to Landlord a certified or cashier’s check payable to Landlord in the same amount as the First Cancellation Payment, and (d) Tenant shall continue to pay all rentals and other charges under the Lease and comply with each and every term and provision accruing under the Lease through the Early Termination Date (and all such obligations accruing through the Early Termination Date shall survive such termination, including but not limited to, any rentals or other charges not yet determined or billed prior to the Early Termination Date).
7.2 It shall be a condition to Tenant’s right to exercise the option set forth in the Section 7 that, as of the date of Tenant’s Exercise Notice and at any time thereafter up to the Early Termination Date, (i) Tenant is not in default under the Lease beyond any applicable notice and cure period, (ii) neither the Lease nor Tenant’s right of possession shall have been terminated and the Lease shall then be in full force and effect, and (iii) Tenant has not assigned the Lease or sublet all or any portion of the Premises.
What To Look For
When reading and reviewing a Termination Option, keep an eye out for the following:
- The Effective Date: On or after 10/1/25
- The Notice Date: No later than 6 full calendar months prior to the Effective Date
- The Termination Payment (if applicable): Sum of (i) one month of current gross rent and (ii) unamortized Landlord Premises Contribution amortized at 10% over a 36-month term. First half paid with Tenant’s notice and second half paid prior to the Early Termination Date.
- Actions or conditions that nullify the right: Tenant shall not be in default, must be in possession and shall not have assigned or sublet the lease.
Additional Resources on Leases
That’s our final post on the subject of Lease Options, at least for now. Next, we’ll wrap up our series on commercial real estate lease fundamentals with a look at Lease Clauses. There are a lot of noteworthy clauses to cover, so we’ll be dedicating several posts to the topic.
Meanwhile, if you’d like to learn more about commercial real estate leases, may we suggest our comprehensive primer on leases, “The ABCs of Commercial Real Estate Leases”? Also, there’s a handy glossary in our Library with definitions to 140+ commercial real estate lease terms, from the common to the obscure. Help yourself to a copy of either. Bye for now.
By Terry Banike, Marketing Manager, Realogic