The first step to entering into a Lease with a new Landlord is generally a Letter of Intent or an Offer to Lease. After you find the perfect space, and you confirm an acceptable rental rate with the Landlord, there are still many other considerations to take into account before signing the final Lease.
Letters of Intent and Offers to Lease express the parties’ intentions to enter into a Lease. They are generally short documents that set out the preliminary understanding of the basic agreement between the parties. A Letter of Intent is often non-binding, while an Offer to Lease is generally binding, but contingent on the parties agreeing to the terms of the actual Lease.
A Letter of Intent or Offer to Lease allows prospective Landlords and Tenants to establish the essential business and financial terms of a lease prior to engaging in lengthy lease negotiations. This can help save time and money for both parties during the lease negotiations, as both parties have confirmed that they are already on the same page with respect to the material terms of the lease. The parties and their lawyers can then focus on fine-tuning specific terms.
Letters of Intent or Offers to Lease also help to avoid the possibility of costly disagreements between the parties by limiting the surprises or unknowns that may otherwise overshadow lease negotiations.
Letters of Intent or Offers to Lease should confirm that the parties will negotiate in good faith, exclusively with each other in the preparation of a Lease. While there is a duty in law to act in good faith in fulfilling contractual obligations, there is no stand-alone duty to bargain in good faith in the pre-contract stage.
The Letter of Intent or Offer to Lease should also provide for a specific period of time in which the lease must be completed. It is helpful to confirm what happens in the event of the termination of the deal before a final Lease has been signed. For example, will deposits or other security be returned? Will there be a right to sue? Will each party bear its own costs?
If there are essential terms that are vital to your business operations in the space (ie. restrictions on similar businesses in the building, special hours of operations, etc.), ensure that these are included in the Offer to Lease so that you don’t need to negotiate for them during the Lease negotiations.
Tips for Negotiating an Offer to Lease or Lease:
- Get a lawyer experienced in representing commercial tenants. This will save time, frustration and money in the long-run.
- Insist that the Lease form be subject to amendments that are mutually agreed to among the Landlord, the Tenant and their lawyers. Many Offers to Lease say that the Lease will be in the Landlord’s standard form. You need to reserve your right to negotiate all terms of the Lease.
- Request a capital allowance from the Landlord to cover the cost of fit ups so that it doesn’t cost you to get the premises ready to start your operations.
- Ensure that the Landlord provides notice to the Tenant of every instance of default (ie. at least 15 days in the event of rent default and 30 days in the event of default of any other covenant) to give you time to cure the default.
- Require a Non-Disturbance Agreement. This way, if the Landlord defaults on its obligations to its mortgage Lender, and the Lender then steps in to take over operation of the building, the Lender agrees that so long as the Tenant is not in default, the Landlord will not disturb the Tenant’s possession of the premises. Without a Non-Disturbance Agreement, there is no relationship between the Tenant and Lender, and if the Landlord defaults on its Lender, the Lender can end the Lease upon six months’ notice.
- Insist on the right to assign, sublet or share possession of all or some of the premises, or change control (if the Tenant is a corporation). Note: the Landlord may require prior notice and Landlord written consent to any such change. You should ask that the Landlord’s consent will not to be unreasonably withheld.
- Confirm a right of renewal for a specified term or terms. By providing this right at the outset, you won’t have to negotiate all over again with the Landlord if you want to stay in the space for a further term (or terms).
- Require that the Landlord have its property insurance policies specifically waive subrogation against the Tenant, its employees and those for whom the Tenant is responsible for in law. Better still, have both the Landlord and Tenant agree to release each other from all liability for any loss or damages to the property of each other, to the extent of their respective insurance proceeds.
- Ensure that the obligation to pay a “proportionate share” of realty taxes and operating costs is based on a true proportionate share (ie. a fraction with the numerator being the Tenant’s rentable area and the denominator being the rentable area of the building). There are many Leases that contain a number of exceptions in the denominator, which, of course, will increase the Tenant’s proportionate share and its costs.
- Negotiate a covenant from the Landlord that it will, throughout the terms of the Lease and any extensions or renewals, operate, maintain, insure, clean, supervise, rebuild, replace and repair the building (including common areas) in a first class manner, as a prudent owner of a similar building would.
- Request the right of termination by the Tenant in the event that all or any part of the leased premises is damaged or destroyed.
- Require that the “unavoidable delay” clause (sometimes called the “force majeure” clause) is reciprocal, and does not apply only to the Landlord.
Once you’ve found your perfect space, make sure you follow the tips provided above before signing the final Lease. They will help you avoid any time consuming delays or costly disputes before and after you move in.
Learn more about Merredith MacLennan, lawyer and member of our Real Estate and Commercial Leasing groups.