Offers to Leases Versus Leases
When a commercial tenant is negotiating with a prospective landlord, an offer to lease, also known as an agreement to lease, often precedes the lease itself. While the actual lease is the supposed focal point of the negotiation, the offer to lease is often “more important than the lease itself.”
This is because the most substantive concessions that landlords give to tenants (or more rarely, tenants with more leverage give to landlords) happen during the negotiation of the offer to lease.
The Importance of an Offer to Lease
The negotiation of the offer to lease is so important because it is often considered that when the offer to lease is finalized, the deal is made. In essence, the difference between an offer to lease and a lease is that a signed offer to lease is a tenant and landlord saying, “we agree to terms on a lease.” Some landlords and tenants in fact treat an offer to lease as a final lease. An offer to lease will therefore determine the substantive features of the lease contract.
While it is true that an offer to lease is not technically a binding lease, and the lease may have to be executed to be effective the importance of an offer to lease is shown in what is required for it to be legitimate. In Ontario, courts have ruled that valid offer to leases must contain “the commencement and duration of the term, the rent and all the material terms of the contract that are not just incidental to the relationship of landlord and tenant”. An offer to lease with these elements may even be legally enforced even though the final lease has not yet been agreed upon.
What should I put into an Offer to Lease?
So, what to specifically ask for in an offer to lease? That of course depends on the needs of who is asking. However, to underscore the importance of negotiating an offer to lease, it is best to keep in mind just how much a lease can vary. Leases can come in many forms, such as in:
- The form of a gross rent lease, where you pay a single amount that covers rent and all incidentals like utilities
- A modified gross rent lease, in which the tenant and landlord share a combination of incidental costs
- A net lease, where a tenant pays the base rent plus an extra expense, such as property tax or insurance, where the landlord pays for the remainder of property expenses
- A percentage rent lease, where the tenant pays a base rent and a percentage of gross sales over a certain amount.
Beyond the form of the lease, an offer to lease should contain the key business terms and substantive clauses of the lease. Such clauses may be restrictive covenants, rent-free clauses, any work that the landlord will perform on the property grounds, an option to extend, as well as many other possible provisions. A lease can vary a tremendous amount, and for this reason, a tenant should not take an offer to lease from the landlord “as is”. If the tenant does that, the landlord (and likely the courts as shown in Northridge) will take that as an enforceable, done deal that just has to be formalized.
Conclusion
In conclusion, note that the most substantive negotiations should happen when both parties are determining the offer to lease. The Lease may technically be the final, ultimate document, but many of the salient terms in it will have originated from the offer to lease and the negotiations preceding it.
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Disclaimer: This article is for informational purposes only and does not provide legal advice, nor does it create a solicitor-client relationship with you or any other reader.
