Right of First Refusal in a Commercial Lease

A right of first refusal (ROFR) in a commercial lease gives the tenant the ability to match a third-party offer if the landlord decides to renew, expand, or sell the space—giving the tenant a contractual option to prevent displacement at market terms.

How a right of first refusal works in practice

When a commercial lease includes a ROFR clause, the mechanics are clearly defined. Suppose a tenant in a 5,000 sq. ft. office space is in year three of a five-year lease, with an expiration approaching. The lease includes a ROFR for renewal. The landlord may offer the space to a new prospective tenant at, say, $20 per sq. ft. per year. Before signing a lease with that third party, the landlord must present the same terms—$20/sq. ft., same lease length, same conditions—to the existing tenant and give them a fixed window (often 3–5 business days) to decide.

If the existing tenant matches the offer, the lease is renewed under those terms. If they decline or don’t respond in time, the landlord is free to lease to the third party at those terms. Critically, the landlord cannot accept a better offer from the third party and then come back to the tenant; the tenant has the right to match the first concrete offer the landlord intends to accept elsewhere.

In a ROFR for expansion, the mechanism is similar. If the tenant wants to expand into an adjacent or nearby space that becomes available, the lease grants them the right to lease that expansion space at the same rate and on the same terms the landlord would offer an outside tenant.

Right of first refusal vs. right of first offer

These terms are often confused, but they operate quite differently. A right of first offer (ROFO) requires the landlord to negotiate with the tenant before entertaining any outside offers. The landlord must present the space and terms to the tenant first, and only if the tenant declines can the landlord shop the space to the market. There is no “matching” mechanism in a ROFO; it is a timing advantage.

A right of first refusal, by contrast, is a matching right. The landlord can negotiate with outside parties and shop the market freely. Once the landlord has a concrete offer they intend to accept, they must present those exact terms to the tenant, who can then match them or pass. A ROFO is more valuable to the tenant because it gives them priority and a right to negotiate favorable terms; a ROFR is valuable mainly if the tenant expects market conditions to remain stable or to improve.

Landlords generally prefer leases with neither clause. If they must grant tenant protections, many will concede a ROFR rather than a ROFO, because a ROFR allows them to test the market and establish pricing before offering terms to the existing tenant.

Valuation and financing implications

The presence of a ROFR in a commercial lease affects both the market capitalization of the property and its ability to be financed. A ROFR:

• Reduces upside for the landlord. If the property appreciates or rental rates surge, the landlord may be stuck renewing at below-market terms because the tenant matches an old offer.
• Increases tenant security. The tenant knows they cannot be forced out at exorbitant renewal rates if they occupy the space well.
• Lowers property value. Commercial real estate appraisers and lenders view a tenant-friendly ROFR as a constraint on the landlord’s ability to maximize revenue. In some cases, a ROFR can reduce the property’s market value by 2–5%, depending on the strength and breadth of the clause.
• Complicates refinancing. If the landlord wishes to refinance the property, a lender may demand a subordination agreement (the tenant agrees that the lender’s security interest is senior) or may discount the loan amount because the ROFR restricts the landlord’s flexibility.

From a valuation perspective, a ROFR effectively caps the landlord’s upside unless the property attracts multiple bidders willing to beat the tenant’s matching offer.

When and why ROFR is negotiated

Tenants push for ROFR clauses in the following scenarios:

1. Long-term occupancy. A tenant planning to occupy a space for 10+ years wants assurance they won’t be priced out at renewal.
2. Specialized improvements. A tenant who has invested heavily in buildout or customization of the space wants protection against displacement.
3. Anchor tenants in retail centers. A successful retail tenant in a shopping center may negotiate a ROFR to prevent a competitor from taking the neighboring space.
4. Industrial and manufacturing. A tenant with significant equipment or production processes established in a warehouse seeks stability.

Landlords grant ROFR when:

• The tenant is creditworthy and reliable.
• The lease is long-term (7–15 years), making renewal certainty less critical.
• Market conditions are competitive, and the landlord needs to sweeten the lease to secure the tenant.

Scope of the ROFR—expansion vs. renewal vs. sale

ROFR clauses can be narrowly tailored or broadly drafted:

• Renewal ROFR: Only applies when the current lease expires and the landlord offers renewal terms. Tenant can renew at the offered market rate.
• Expansion ROFR: Applies if adjacent or nearby space becomes available (e.g., another tenant vacates). The tenant can expand into that space at market rates.
• Right to purchase (sale ROFR): In some leases, the tenant has a ROFR to purchase the entire property at a price the landlord would accept from a third party. This is more valuable but less common.

A single lease might include all three scopes, making it quite tenant-friendly. A landlord would typically negotiate for a narrower clause—perhaps renewal only—to preserve flexibility.

Enforcing the ROFR and avoiding disputes

Common pitfalls that create disputes:

• Ambiguous terms. If the lease does not specify what “same terms” means, conflicts arise. Does it include parking, signage, CAM charges, length of lease?
• Timing lapses. If the landlord fails to offer the space to the tenant within the required window, the tenant may claim a breach and demand specific performance (forcing the lease to the tenant’s benefit).
• Failure to disclose. If the landlord negotiates with a third party without formally offering to the tenant first, the tenant can sue for interference with contract rights.

Best practice is to ensure the lease explicitly defines:

• Which spaces or expansions trigger the ROFR.
• The exact notice and response timeline (e.g., “written offer via email; tenant has 72 hours to respond in writing”).
• Whether the tenant can match any offer or only the first offer the landlord intends to accept.
• What constitutes “same terms” (rent, lease length, tenant improvement allowance, etc.).

See also