In this blog, I’ll be discussing the rights of first offer and rights of first refusal.
Rights of First Offer for Additional Space
These are provisions that favour the Tenant. They’ll typically say something like: so long as the Tenant has not defaulted on the lease, and there is additional space in the property that the Landlord can/wishes to lease, then the Landlord will provide the Tenant with notice and the Tenant can put in the first offer for the space. There may be time limits on when the offer must be put in by (e.g. a few days or weeks) and when the definitive lease for the new space needs to be accepted by (e.g. a few weeks or months). If the offer is accepted, then the Landlord and the Tenant will enter into a lease. The Landlord has a duty to negotiate in good faith to try to reach an agreement. If the offer is rejected, then the Landlord can try to lease the space to someone else. There are typically limits on the number of times throughout the term of the lease that the Tenant will be entitled to use a right of first offer to lease additional space. That ‘additional space’ may also be limited in that it must be IMMEDIATELY BESIDE the Tenant’s existing space (not necessarily space in the building/project / any other building which the Landlord owns). Landlords prefer rights of first offer for additional space as opposed to rights of first refusal (discussed below) because the former gives the Landlord more flexibility in accepting the terms for the new lease.
Right of First Refusal for Additional Space
This is another provision that is in favour of the Tenant. It basically says that, so long as the Tenant is not in default under the lease if the Landlord receives a bona fide offer from a third party for additional space which the Landlord has available / wishes to lease, then the Landlord must take that offer and present it to the Tenant AND if the Tenant wants, they can accept the same terms and conditions as are in that offer to get the additional space. So it’s now up to the Tenant to accept or REFUSE to accept the third party offer as their own (which has been presented to the Landlord). And they have the right to do so again, within a certain timeframe.
Nuances about these rights
If you’re a dentist and are negotiating rights of first offer and rights of first refusal with a landlord, just be mindful of things like:
- WHO can exercise these rights (the Tenant, you personally, etc.) and whether these rights are extinguished if the Tenant or the Landlord changes (changes names, changes from individual to person, changes because of a purchase/sale).
- WHEN these rights need to be exercised, be mindful of timelines since the Landlord won’t want the Tenant to have too much time to contemplate accepting a third-party offer for additional space (in the context of a right of first refusal).
- WHETHER these rights are extinguished after the Term expires or is terminated.
- WHETHER these rights are extinguished after a set timeframe or number of uses (e.g. x total uses throughout the Term or one (1) use every x number of years).
- WHETHER these rights are extinguished if the Tenant ever breaches the lease.
- WHETHER an offer to lease (not just a full-fledged lease) that is presented to the Landlord will suffice in triggering the right of first refusal.
- WHO will bear the costs of actually negotiating the lease after a right of first offer or right of first refusal has been accepted or triggered, as the case may be.
- MAKE SURE the Landlord hasn’t entered into leases with other tenants that give THEM similar/same rights with respect to available premises.
- BE VERY CAREFUL when describing premises that are “adjoining” or “contiguous”. You’d think these need to be premises that are touching to the left or right, etc., of the existing space. But what about premises that are available directly above or below the existing space? It may be better to leave it open (for the Tenant) or describe entire floors or units.
- WHAT if work is required to restore the additional space to a state in which the Landlord can lease (i.e. clean, maintained, in working condition, capable of sustaining an operating business, etc.)? Try to factor that one into the right of first offer or right of first refusal from the get-go so you’re not wasting time negotiating with the Landlord at the last minute!
If you need a professional to help you review your existing rights or negotiate an amendment or new rights, feel free to contact us!