The Importance of Offers to Lease for Tenants

It is common when a landlord and tenant are negotiating the terms of the lease for certain premises that they enter into a relatively short agreement which is often referred to as an Offer to Lease. An Offer to Lease generally sets out the key business terms and some of the legal terms of the lease arrangement. The Offer to Lease will often state that the landlord will have a formal comprehensive Lease agreement drawn up within a short period of time after the signing of the Offer to Lease and that the tenant will be required to sign the landlord’s standard lease agreement, without amendment. It is very critical that a tenant ensure that this provision be amended so that the tenant and its counsel have the right to negotiate amendments to the Lease which are satisfactory to both the landlord and the tenant.

From a tenant’s perspective, the Offer to Lease is more important than the Lease itself because it is during the negotiations of an Offer to Lease that a landlord may be prepared to consider giving a prospective tenant concessions in order to persuade the prospective tenant to agree to lease the premises. The tenant is not likely, if at all, to obtain concessions from the landlord on the business terms of their lease arrangement at the time that the Lease has been drawn up by the landlord, since the landlord has already obtained the tenant’s agreement to lease the premises. Of course, a tenant isn’t likely to get any concessions from a landlord unless he/she asks for them.

A tenant’s ability to obtain concessions will depend very much on his/her bargaining strength with the landlord which will be affected by factors such as the current rental market, the size of the space being rented, the availability of alternative rental space in the landlord’s building and within the rental market generally.

A tenant should consider asking for some or all of the following concessions (which should not be considered an exhaustive list of possible concessions):

• Rent free period.
• Leasehold improvement allowance – where the landlord agrees to pay some amount towards the tenant’s leasehold improvements.
• Landlord’s work – where the landlord, at its cost, agrees to do some of the leasehold improvement work to the leased premises.
• Option(s) to renew/extend the lease.
• Restrictive covenants – for example, giving the tenant the exclusive right to carry on a certain business within the building or complex operated by the landlord.
• Option (or right of first refusal) to lease additional space in the building.
• Landlord’s written approval to the tenant’s proposed leasehold improvements to the leased premises.
• Representations and warranties regarding the condition of the leased premises and its heating, air-conditioning and other systems.
• Estimate of additional rent.
• Right of the tenant to erect signage on the outside of the premises or on the building’s directory (if applicable).
• Parking spaces – for tenant’s use and its customers and clients.
• Non-disturbance agreement from the landlord’s lenders – which is an agreement whereby the landlord’s lenders agree that in the event that the lender forecloses on or takes possession of the building the tenant can continue to remain in possession of the leased premises provided that it complies with the terms of the Lease.

It is best that a tenant determine in advance which concessions would be most beneficial to the tenant’s business. That way the tenant can focus on trying to get those specific concessions from the landlord.

It is advisable that you consult with your professional advisers and have the Offer to Lease reviewed before you sign it.

The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.