Options, ROFO, and ROFR: The Provisions That Kill Deals When Drafted Wrong

Options and preferential rights can represent millions of dollars in value:

• Renewal options determine whether a tenant can stay at predictable terms
• Expansion rights control access to additional space
• Rights of First Offer give tenants first crack at available space
• Rights of First Refusal let tenants match third-party offers

When these provisions are ambiguous, both parties claim the interpretation favoring them. Litigation follows, making them among the most expensive clause mistakes in commercial leases.

DISCLAIMER: The example provisions throughout this post are illustrations only, not legal advice. We are not recommending this language for use in your leases. Your clauses should be drafted by your own counsel for your specific deal.

The Typical Language

"Tenant shall have the option to renew this Lease for one (1) additional term of five (5) years at the then-prevailing Fair Market Value rental rate."

What's Missing

Who Determines FMV?

• Landlord proposes?
• Tenant proposes?
• Third-party appraiser?
• Mutual agreement?

What Comparables?

• Same building?
• Comparable buildings in the market?
• Adjusted for tenant's build-out?
• Credit for existing improvements?

What If Parties Disagree?

• Arbitration?
• Average of two appraisals?
• Third appraiser decides?
• Baseball arbitration (each side picks, arbitrator chooses one)?

Is There a Floor?

• Not less than current rent?
• Not less than a specified amount?
• Can FMV be lower than current rent?

A Complete Renewal Provision

"Tenant shall have the option to renew this Lease for one (1) additional term of five (5) years by delivering written notice to Landlord not less than twelve (12) months prior to the expiration of the initial Term.

The Base Rent during the Renewal Term shall be the Fair Market Value rental rate for comparable space in comparable buildings in the [defined submarket], determined as follows:

(a) Landlord shall deliver its determination of FMV within thirty (30) days of Tenant's renewal notice.

(b) If Tenant disagrees, Tenant shall notify Landlord within fifteen (15) days and propose an alternative FMV.

(c) If the parties cannot agree within thirty (30) days, each party shall engage a licensed MAI appraiser to determine FMV. If the two appraisals are within 10% of each other, the FMV shall be the average. If they differ by more than 10%, the appraisers shall jointly select a third appraiser, whose determination shall be binding.

In no event shall the FMV be less than the Base Rent in effect immediately prior to the Renewal Term."

How ROFO Works

When landlord decides to lease space covered by the ROFO, landlord must first offer it to the existing tenant before marketing to others.

The Typical Failure: What Triggers the Offer?

"Landlord shall offer the ROFO Space to Tenant before leasing it to any third party."

Problems:

• Does "leasing" include renewals with existing tenants?
• What about expansion of adjacent tenants?
• What if landlord decides to hold the space vacant?
• What if landlord leases to an affiliate?

A Better Triggering Definition

"Landlord's obligation to offer the ROFO Space shall be triggered when (a) the ROFO Space becomes Available, and (b) Landlord determines to actively market the ROFO Space for lease to third parties.

'Available' means (i) any existing lease of the ROFO Space expires or terminates, and the existing tenant does not exercise any renewal or extension right, or (ii) the ROFO Space is vacant and not subject to any lease, letter of intent, or binding agreement."

Other ROFO Issues

What's in the Offer?

• Just the space?
• Proposed rent and terms?
• All material terms landlord would accept?

How Long to Respond?

• Typical: 10-15 business days
• Too short and tenant can't evaluate
• Too long and landlord loses prospects

What Happens If Tenant Declines?

• Landlord can lease to anyone?
• At any terms?
• For any term length?
• Or only on terms no more favorable than offered to tenant?

How ROFR Works

Landlord negotiates a deal with a third party. Before signing, landlord must offer tenant the opportunity to match the third-party terms.

The Fundamental Problems

Chilling Effect on Marketing

Third parties don't want to negotiate a deal that tenant can snatch away. ROFR reduces landlord's negotiating leverage.

What's a "Bona Fide Third-Party Offer"?

• Letter of intent?
• Fully negotiated lease?
• Signed but subject to ROFR?

What Does "Match" Mean?

• Identical terms?
• Economically equivalent terms?
• Can tenant substitute different credit enhancement for the one offered by the third party?

Carve-Outs and Limitations

Excluded Transactions:

"This ROFR shall not apply to (a) renewal or expansion by existing tenants, (b) leases to affiliates of Landlord, (c) leases as part of a multi-premise transaction where the ROFR Space is less than 25% of the total transaction."

Waiver After Decline:

"If Tenant declines to match a bona fide third-party offer, Landlord may lease the ROFR Space to such third party on the offered terms (or terms no more favorable to the third party). If Landlord does not execute a lease with such third party within 180 days, or if Landlord proposes to lease on materially more favorable terms, Landlord shall re-offer the ROFR Space to Tenant."

Regardless of the specific right:

Notice Requirements

• Specific delivery method (certified mail, email with confirmation, etc.)
• Specific address for notices
• When notice is deemed delivered

Condition Precedent

"Tenant's right to exercise this option is conditioned upon Tenant not being in material default under this Lease at the time of exercise and at the time the option term would commence."

What is "material"? Define it or litigate it later.

Assignment of Rights

• Do options transfer with assignment of the lease?
• Only with landlord consent?
• Not at all, personal to original tenant?

These questions become especially critical when amendments modify the original option terms without addressing downstream effects.

Expiration of Unexercised Rights

• Do unexercised options survive?
• For how many offerings/opportunities?
• Time limit on the right?

Every one of these exercise windows is a critical lease date that must be calendared and tracked. A perfectly drafted option provision is worthless if the exercise deadline passes unnoticed.

Options and preferential rights are among the most valuable provisions in a lease, and the most dangerous when poorly drafted. A structured drafting system that enforces completeness in option provisions, built around your specific forms and deal logic, prevents disputes that can dwarf the cost of careful drafting. The evolving office lease landscape is making these provisions even more critical as flexibility terms proliferate.