What is a right of first refusal in an industrial lease?

What is a right of first refusal in an industrial lease?

A right of first refusal (ROFR) is a lease clause that grants the tenant a priority right to lease a specific adjacent or nearby unit before the landlord can commit that space to another tenant. When the landlord receives a bona fide offer from a third party on the ROFR space, they must first present that offer to the existing tenant, who then has a defined window — typically 5 to 10 business days — to match the offer and take the space on the same terms. If the tenant declines or fails to respond within the window, the landlord is free to proceed with the third party. The right of first refusal is most commonly negotiated by tenants who anticipate growth but are not ready to commit to additional space at the time of signing. It is particularly valuable in GTA industrial markets where vacancy rates are low and adjacent expansion space is difficult to secure once occupied by another tenant. A ROFR allows the tenant to maintain operational continuity — staying in the same building, using the same loading infrastructure, avoiding relocation costs — if growth materializes. The ROFR space is typically defined in the lease by unit number, square footage, or physical location within the building. Multi-tenant industrial buildings are the most common context for ROFR clauses; single-tenant buildings generally do not require them since the tenant already controls the entire facility. There are two common ROFR structures in GTA industrial leases. The first is a right to match on the same terms as the third-party offer — the tenant receives a copy of the third-party offer and must elect to take the space at the exact same rent, term, and conditions. The second is a right of first offer (ROFO), which is sometimes confused with a ROFR — in a ROFO, the landlord must offer the space to the existing tenant first, before marketing it to the public, at a rent and terms to be negotiated between the parties. A ROFO gives the tenant earlier engagement in the process but less certainty on price; a ROFR gives the tenant a defined matching right but only activates once a third-party offer exists. Key negotiating points for a ROFR clause include the notice period the landlord must give the tenant when a third-party offer is received, the number of days the tenant has to exercise the right, whether the right applies to sublease offers as well as direct leases, whether the right survives an assignment of the tenant's lease, and whether the right applies on a continuous basis throughout the term or only during a specific window. In Ontario, a ROFR in a commercial lease is an equitable right that can be enforced through specific performance if the landlord breaches it by leasing to a third party without proper notice. Courts in Ontario have consistently upheld ROFR clauses in commercial leases where the notice procedures are clearly defined and the tenant can demonstrate a valid claim. The practical limitation of a ROFR is that it only activates when the landlord receives a third-party offer. In a tight market like GTA industrial — where vacancy rates have ranged from 1% to 6% since 2019 — the ROFR space may never become available during the tenant's term, or may be offered at a market rent that the tenant cannot accept. Tenants with firm expansion requirements are better served by negotiating an option to expand at a fixed or capped rent rather than relying solely on a ROFR. Michael Law advises GTA industrial tenants on lease negotiation, right of first refusal structuring, and expansion strategy across Durham Region, Halton Region, Peel Region, and the 905 corridor. Contact Michael at mlaw@lennard.com or (905) 917-2045 to discuss your lease terms.