Negotiations between a landlord and tenant for a lease of commercial space will often begin with the preparation and signing of an offer to lease. Far too often, clients do not recognize the importance and significance of the offer to lease, and will only engage legal counsel after the offer to lease has been signed and they are at the stage of negotiating the formal lease agreement.

An offer to lease is a document which is typically much shorter than a formal lease agreement, which sets out the key deal terms and creates a framework for the negotiation of the formal lease. An offer to lease may either be binding or non-binding. It is particularly important to involve legal counsel at the offer to lease stage when the offer is intended to be binding on the parties, which is typically the case.

It is particularly important for the tenant to seek legal counsel at the offer to lease stage, as this is the time at which the landlord is likely most willing to make concessions to the tenant.  It is the time when the tenant should not hesitate to ask for fundamental deal terms, for example:

  • a rent-free period;
  • a tenant improvement allowance;
  • options to extend the term;
  • an exclusive use provision; or
  • parking or signage rights.

The tenant’s ability to negotiate concessions will of course depend on the current market conditions and the parties’ respective bargaining strength.

The offer to lease stage is also the time at which the landlord and tenant can create a framework that will help to avoid disputes once the time comes to negotiate the formal lease.  Often we find that offers to lease are vague or even silent on the respective repair and maintenance obligations of the parties, which can lead to a dispute in the lease negotiation.  The tenant may be surprised that the landlord expects the tenant to make all major repairs to the premises – which, for example, might include a requirement to repair or replace the HVAC system.

It is important that the offer to lease clearly set out the fundamental deal terms because the parties that negotiate the offer to lease may not be the same parties who negotiate the lease.  Typically, the offer to lease will be negotiated through commercial realtors, while the formal lease agreement will be negotiated by legal counsel.  A well-crafted offer to lease will help ensure that all parties are on the same page regarding the key deal terms.

Offers to lease will often contain a provision that the tenant will sign the landlord’s standard form of lease within a particular period of time. If the tenant is not able to engage legal counsel before signing the offer, they should at the very least modify this provision to make sure that the formal lease will be subject to negotiation and amendment by the parties and their legal counsel. Without this, the tenant may find it has little to no ability to negotiate the terms of the formal lease.

Any conditions that need to be satisfied by the landlord or the tenant should be clearly specified in the offer to lease.  The tenant might wish to make the offer to lease conditional on securing construction financing or obtaining zoning approval, while the landlord might want to complete due diligence on the tenant’s financial status and business plan.

Landlords and tenants should also involve their engineers, architects or contractors at the offer to lease stage. It is prudent to set out, in clear detail, the work that the landlord needs to complete (if any) in order to make the premises ready for the tenant, and to set out the work that the tenant intends to complete once it takes possession. Tenants should be wary of leaving these things “to be determined”, in case the landlord is not willing to allow the tenant to make all of the renovations that the tenant wishes to make.

To avoid disputes and ensure a smooth negotiation process, we encourage landlords and tenants alike to seek out proper advice before signing an offer to lease.  This important step, albeit a commonly skipped step, will benefit all parties involved.

This article was prepared by:

Niall Nazarko
[email protected]

 This article represents general information and is not legal advice. Please contact us if you would like legal advice that is tailored to your particular circumstances. We would be happy to help.