Offers to Lease
If you have identified a potential location to start your business or open a new location for your existing business, you will likely be asked to sign an offer to lease. An offer to lease is a relatively short agreement that sets out the essential business terms of the lease. The offer to lease is crucial from the tenant’s perspective because this is the stage where landlords are most willing to negotiate and make concessions to the prospective tenants. (See our article regarding things to look out for when assuming an existing lease in the context of purchasing a business)
Below is a list of common terms found in the offer to lease:
- Initial Term of the Lease: The period of time the lease agreement will be in place.
- Commencement Date: The start date of the lease agreement.
- Renewal Options: The right of the tenant to exercise an option to renew the lease for a specified period of time after the expiry of the current term. Tenants may not want to be locked into a long initial term for various reasons (e.g. uncertainty of the business). Renewal options provide tenants with the flexibility to renew the lease if the business is successful.
- Fixturing Period: A period of time the tenant will have access to the premises in order to complete the construction of the unit. Tenants should speak with their consultants and contractors to ensure the fixturing period is sufficient.
- Rent-Free Period: A period of time the tenant will not have to pay rent despite having access to the premises. This often coincides with the fixturing period.
- Landlord’s Work: The premises will often require work in order for it to be suitable for the tenant’s proposed use. Tenants can negotiate and request that the landlord complete certain work at the landlord’s expense.
- Rent: The amount of rent the tenant will pay and whether the lease is a gross lease or a net lease. A gross lease provides that the tenant will be responsible for a fixed amount and the landlord will be responsible for all other expenses for the property (e.g. utilities, maintenance). Under a net lease, the tenant will be responsible for a minimum rent amount plus additional rent for the operating costs of the property. Landlords will typically provide an estimate of additional rent at the beginning of each year and will subsequently provide a statement shortly after the end of the year with the actual figures. Tenants will be responsible for paying any deficiencies or will be credited or refunded any excess additional rent paid.
- Permitted Use: The permitted use provision will typically restrict the tenant from using the premises for any purpose other than the specified use.
- Exclusivity: An exclusivity provision restricts the ability of the landlord to lease other premises within the development for a specified use. This is important in certain industries to prevent competitors from opening up within the same development.
- Guarantors: Landlords will often require the principal(s) of the tenant (if the tenant is a corporation) to sign the lease as a guarantor to guarantee the obligations of the tenant.
- Formal Lease Agreement: It is common practice for landlords to require tenants to enter into a formal lease agreement that incorporates all of the key terms above and covers other terms not included in the offer to lease.
The parties should exercise caution and be clear whether the offer to lease is intended to be a binding or non-binding agreement. If it is a binding agreement, the terms of the letter of intent will govern the relationship of the parties until the formal lease agreement is signed. If it is a non-binding agreement, the parties will have to work together to execute a formal lease agreement before the landlord and tenant relationship is finalized.
Felix Ng, Associate Corporate Counsel
© Kalfa Law 2020