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Life Cycle of a Tenancy - Part 2: Offer to Lease

The Offer to Lease is usually the first, and always the most important, tenancy document an occupier ever sees. Typically only a few pages long, this document often describes more than 90 per cent of the tenancy terms and business conditions that will govern most aspects of the tenancy for decades. Do not underestimate the importance of this document.

After selecting a trade area and a candidate site (or sites) within that trade area, a prospective tenant will then prepare and forward their Offer to Lease to the landlord. The Offer to Lease is a conditional offer which allows a prospective tenant to consider more than one candidate site at a time. It is strategically important to have a “Plan B”.

Various Forms of Offer to Lease

In the real estate industry, “Offer to Lease” has come to mean any form of offer including a true Offer to Lease, a letter of interest, a letter of intent, or even a proposed lease. Our firm prefers to use an Offer to Lease. This form is comprehensive enough to confirm all important details, is conditional on the tenant’s due diligence, and is binding on both parties. This is the most efficient and effective approach. A non-binding document often wastes time and may indicate that the landlord is collecting bids.

Typical forms of Offer to Lease include the Ontario Real Estate Association (O.R.E.A.) standard form, the landlord’s “standard” form, and custom drafted forms specific to the tenancy. The O.R.E.A. form provides a basic structure which needs to be supplemented with schedules refining some of the detail in the main body of the offer, resulting in back and forth negotiation. Landlord forms of Offer to Lease are specific to the property and lease; there is a lot of important information that can be gathered by examining this form of offer. The most powerful form of offer is custom drafted on behalf of the tenant to address their needs specifically. This form will present the tenant’s position in the best context and will get down to very detailed tenancy issues directly.

Unfortunately for tenants, most landlords will not consider proposed tenancies on any form except their own, which requires an experienced and adept eye on behalf of the tenant.

Terms and Conditions

The Offer to Lease should set out all primary tenancy terms and business condition. For example:

•  Premises (size, shape, measurement criterion, location and condition now and then)
•  Term (possession date, fixturing period, options to renew, termination for demolition)

•  Rent (base plus additional over the term and option periods, free rent periods, tenant improvement allowance)
•  Tenant rights and flexibilities (assignment, sharing, subletting)
•  Landlord requirements, obligations and conditions
•  Use (exclusivity, signage, parking)
•  Lease form (and negotiation terms)
•  Conditions (bank financing, solicitor’s approval, zoning, space planning, construction budgeting, form of lease)

Negotiating the Offer to Lease

Negotiating the Offer to Lease is both an art and a science. Assessing the landlord, finessing the process and diplomatically handling any disagreement, convincing resolution, understanding the dynamic terms of the deal, and administrating the Offer to Lease process are all art forms.

Calculating quantifiable variables, projecting likely scenarios, providing alternative “equal value” solutions, and deeply understanding the deal in its entirety, are all science.

It takes significant experience to correctly administer and successfully negotiate an Offer to Lease. What most tenants don’t know can, and will, hurt them. The key is to have a scientific tool kit to draw on that has been built by years of experience and to be personable enough to practice as an artist. Any capable representative will be able to save the tenant more than their fees; a superior representative can actually help the tenant make money on their Offer to Lease.

Avoiding Pitfalls: what to look out for while administering an Offer to Lease

Get down to specific details of the deal as soon as possible. It’s an incredible waste of time to spend three months haggling over a few dollars only to find out there is a demolition clause in the Lease and find that you have to abandon the negotiation.

Your offer must be conditional. A period of time to complete “due diligence” is necessary before the Offer is final and binding. If the landlord refuses to have a condition, do your homework before signing. DO NOT sign an unconditional offer before:

• receiving approval from your bank
• confirmation that the zoning permits the anticipated use

• studying and understanding the proposed Lease
• you are certain about the trade area
• receiving your solicitor’s approval

Make sure all tenancy terms and conditions are addressed. What is not included is just as important as what is included.

Don’t be penny wise and pound poor. In addition to saving you the time and stress of negotiating an aspect of business where you may have little experience, a capable representative can save your deal. Years of experience negotiating and drafting thousands of Leases will help navigate around potential trouble spots, find direct and immediate savings (equal to, or greater than, the fees) and provide you with facilities in the lease document that can continue to save money and add value to your practice over the life cycle of your tenancy.

 

Written by
Ian D. Toms and Jennifer J. Miles