4 Types of Expansion Clauses in Commercial Leases

The expansion clause in commercial leases is a negotiable agreement between the landlord and tenant that permits the tenant an equitable right to expand within the building or property they are being leased. It is often offered to tenants to provide them the opportunity to pay for additional space peradventure the present space leased becomes too small for their business in the future.

For a small business or startup company, expansion clauses offer the opportunity to quickly grow existing operations in the future in case the need arises, without the financial penalty or obligation if the company decides against it for whatever reason. For big businesses, it also enables management to defer or delay expansion until the time is right.

Types of Expansion Clauses

There are four expansion clauses provided in a commercial lease. Here are the ones you should know:

Must Take Clause

A must-take clause is a provision that obliges a tenant to lease an entire space ahead of the actual time it will be needed. Usually, the tenant starts by paying for the part of the space that is currently needed for a pre-negotiated period often called the "ramp-up" period, and then begins to pay for the entire space once the pre-negotiated period is over notwithstanding if the entire space is eventually needed or not.

Option to Expand Clause

The option to expand or pure option or right to expand clause is an expansion clause that permits a tenant to reserve an expansion space for future use at no extra cost. Here, the tenant is given a time frame under which this expansion must take place, however, in a situation where the tenant is unable to make use of the reserved space within the given time frame, the landlord is allowed to lease out space to another prospective tenant.

Right of First Refusal Clause

Right of first refusal or first right of refusal (ROFR) is an expansion clause that gives better leverage to a current tenant over an available expansion space when there is a third-party (prospective tenant) interested in it. Usually, the landlord is allowed to put up the available space for lease but must allow the tenant to see the terms being offered by the other parties and decide if to let go or expand based on those terms. A tenant's right to expand on the space is revoked once they decline to seize the opportunity the first time.

Right of First Offer Clause

A right of first offer (ROFO) is an expansion clause that allows a current tenant to be the first to know and pay for any available advantageous space within a building if interested before the landlord puts it up for lease. Here, there is no binding agreement that the tenant must rent the available space thus the landlord is allowed to lease out to a third party upon confirmation that the tenant is not interested.

It is advisable to have a professional tenant rep with relevant negotiation skills in advising the best expansion clause to choose. Expansion clauses give tenants massive advantages at the expense of the landlord.