Offers to Lease versus Leases

Many businesses lease their physical premises, and it is usually one of their biggest expense items. But do you actually have a formal Lease?

The distinction between an Offer to Lease and a Lease is a grey area for some. This is partly due to Landlords and Tenants treating Offers as a final Lease, or not executing an Offer to Lease at all. Everything seems to be referred to as the “Lease”.

The situation will dictate the terms of the Offer to Lease and of the actual Lease, but what happens if an Offer to Lease is the only document that is executed? Or when the Offer to Lease requires that the Tenant execute the Landlord’s Standard Form Lease?

If a true Offer to Lease is executed, it does not constitute a binding Lease. The Offer to Lease is just that – an offer. While there is an obligation for the parties to negotiate the Lease in good faith, sometimes the final Lease is never executed. This can be for a number of reasons, but most often it is because the parties cannot agree on all of the terms in the final Lease. It might even be that the Landlord and the Tenant grow tired of negotiating back and forth and as a result the “loose end” of executing the final Lease never occurs.

If a final Lease is not executed, the Offer to Lease may be binding on the parties if two conditions are met. First, the Offer must contain all materials terms of the parties’ agreement, such as price, duration, and a description of the property. Secondly, the Landlord and Tenant must have conducted themselves as if the Offer to Lease was binding.

The wording of an Offer is important; pay close attention to what it actually includes. Do not think of it as only being an “Offer”, as it may end up being the document that governs the terms of your relationship. As well, if a clause or concept that you want included in the final Lease is missed in the Offer, there is nothing to rely on to ensure it is included in the final Lease.

The Landlord’s Offer sometimes includes a clause requiring the Tenant to sign a Standard Form Lease that the Landlord provides. This is an unacceptable clause from a Tenant’s point of view. It forces the Tenant to sign a binding Lease sight unseen and with no ability to negotiate the terms of it. Remove this clause from the Offer to Lease, or at the very least amend the section to state that the Standard Form is subject to negotiation by the parties.

On the other hand, if this type of clause is in an Offer that you as a Tenant have already signed, and the Landlord attempts to negotiate different or new terms into their Standard Form Lease, you cannot be forced to agree to the new terms. This may be small comfort, as the unamended Standard Form might still be unacceptable. Remember that almost all Leases are slanted heavily in favour of the Landlord.

There are a couple of other things that Tenants should keep in mind when weighing an Offer. First, consider whether there should be tight timelines. While there might be the odd occasion when the timing should be left loose (perhaps you just want to tie up the premises for a while without having to commit to a formal lease), it is normally important to get the Lease done and the property occupied as soon as possible.

In such a case, the Offer should provide a deadline date or time period for the final Lease to be signed. If the time expires, and both sides agree to extend, there is little problem. But when that happens, either side can usually walk away without penalty, putting the other party at a disadvantage. When a time period is provided for, do everything you can to keep the process moving.

Another issue is the timing of payment of security deposits. Landlords normally require at least part of the deposit to be paid upon signing the Offer, without waiting for the formal Lease. Even if the Tenant can legally walk away from the Offer, the Landlord might delay or refuse to return the deposit. The Tenant can usually prevail if this becomes an issue, but there is the possibility of extra time and effort being expended. As a result, Tenants should at least try to pay deposits only when the final Lease is signed.

As with any agreement, Offers to Lease and Leases can vary markedly in their wording and effect. While most businesses will have a Lease reviewed by their lawyer, they should also have Offers reviewed before signing, since the consequences can be significant.