During the past several decades, woody plants have been encroaching into grasslands around the world. This transition in plant dominance is often explained as a state shift in bistable ecosystem dynamics induced by fire-vegetation feedbacks. These feedbacks occur when woody plants are able to displace grasses because of their better access to soil water and light. On the other hand, grasses can displace woody plants because of their ability to increase fire frequency and of the higher susceptibility of woody plants to fire-induced mortality. In this study, we present an ecohydrological framework to investigate the displacement of grasses by woody plants. Considering the effect of lateral root spread and of soil water and light limitations, we found that woody plant encroachment can substantially suppress grass production even without the presence of grazers. Bistable dynamics emerge as a result of the grass-fire feedback for a wide range of rainfall conditions, fire susceptibility, and woody plant growth rates.