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The right of first offer and right of first refusal

Imagine this: You rent a sizable space for your restaurant in a nice commercial center. Business is so good that you’d eventually like to expand — so you’re thrilled to find out that the tenant next to you is moving out.

Unfortunately, there’s no guarantee that your landlord will let you have the newly available space unless you’ve negotiated for either the right of first offer or the right of first refusal.

What’s a right of first offer?

Essentially, this is a guarantee that the landlord will offer you the space that’s become available to you before offering it to anyone else. Naturally, you only have a limited amount of time (whatever is agreed upon in your lease) to accept the offer and work out a deal for the additional space with the landlord. If you decide to pass on the offer, the landlord can then put the space up for rent to other parties.

What’s a right of first refusal?

When a new space becomes available, the landlord is generally free to market it as usual. However, any deal the landlord makes for the space has to be a conditional one — because you have the right to step in and accept the terms of the lease that the other party negotiated and take the space for yourself. If you decide to pass — or let the time you have in which to make a decision expire — the landlord can then move ahead with the agreement with the other tenant.

Both of these have their advantages, but the right of first refusal is generally considered to be the superior option. For one thing, it usually gives the tenant who holds it more time to consider his or her position without having to act.

Negotiating a commercial lease is a complicated process, and it definitely pays to think ahead! When you’re in the midst of negotiations, always try to leave yourself in a strong position when it comes to your future options.