What’s an Offer to Lease?

Wait before you sign that Offer to Lease!

In Ontario, Commercial Leases often start with an Offer to Lease, which is also called an agreement to lease. The trend for Offers to Lease is fading in the United States with many Landlords preferring to proceed straight to the Lease. However, in Ontario many Landlords are still content with negotiating an Offer to Lease, and then allowing the Tenant to take possession of the premises before the Lease is signed. This is normally not recommended as some Tenants want to walk away from the lease after signing the Offer to Lease. Furthermore, it does not provide much room to negotiate on the terms that were not included in the Offer to Lease but are included in the Landlord’s standard Lease form.

The Landlord will provide its standard form of Offer to Lease with some items amended such as the rent, terms, etc. as initially negotiated with the potential Tenant. It is highly recommended to have your lawyer review the Offer to Lease before signing it. Negotiating an Offer to Lease can be more important than negotiating the Lease itself. At this stage, the Landlord has an incentive to make certain concessions if it wants the deal to firm-up.

What’s in an Offer to Lease?

If the Tenant is looking for anything specific related to the premises, the time to bring the list to the Landlord’s attention is at the Offer to Lease stage. Certain requests are as follows:

  • a rent-free clause (some Tenants request the first 1-3 months’ free of rent and are normally responsible for their utilities and insurance during the rent-free period);
  • a leasehold improvement allowance, option(s) to extend (most commercial leases have a 10 year term or a five plus five year term and it is always recommended to have at least one option to renew);
  • first right of refusal (on a sale of the building or if the premises are damaged and rebuilt after the lease is terminated due to the damage);
  • a restrictive covenant (exclusivity on the Tenant’s business to ensure that no other tenant with the same business can rent in the building);
  • a waiver of subrogation, mutual releases, possibility of assigning the lease without the Landlord’s prior written consent if the business is a franchise to be operated by a franchisee of the Tenant/franchisor;
  • the transfer/assignment fee (which can be as high as a percentage of the sale price of the business on a assignment from a sale of assets or shares of a tenant);
  • a non-disturbance agreement (if the Landlord defaults on its mortgage and the mortgagee takes over the building, the Tenant wants to ensure that it can continue to rent the premises as long as the rent is paid); and
  • any work that the Tenant wishes the Landlord to perform to the premises.

Negotiate smartly

Basically, if the Tenant doesn’t ask, it won’t get. Tenants will be surprised how many incentives they can receive from a Landlord.

An Offer to Lease typically includes a provision whereby the Tenant will sign the Landlord’s standard lease form without changes within a certain period of time from receipt of the Lease. It is important to ensure that any such clause provides the Tenant’s lawyer the right to request reasonable changes to the Lease. The Landlord will normally insist that any such changes be “non-financial amendments”. This is normally not an issue as the price per square foot is fixed prior to the Offer to Lease being prepared by the Landlord.

A signed Offer to Lease is a deal

An Offer to Lease is normally legally binding, unless otherwise stated. Once signed by all parties, it constitutes a binding agreement, which if breached, can lead to arbitration or litigation, depending on the method of dispute resolution set-out in the Offer to Lease, if any.

If you have questions about the Offer to Lease or leasing process, or require assistance with other commercial real estate matters, please get in touch with us.