Monday, August 27, 2007

Signing an Offer to Lease

If your business is in need of commercial space and you are going to have to lease that space, here are some quick thoughts to keep in mind. First, if you are working with a real estate agent, who is negotiating on your behalf, and that agent is experienced with commercial leasing, you are one step ahead of the game. Still, it would be prudent to run the Offer to Lease by your lawyer before submitting it to the Landlord. It is quite common for a lease agreement to run for three to five years. If you calculate the amount of rent you will pay over the life of that lease you may discover that it one of the biggest contracts you will ever sign. Leases are usually relatively large commitments, which means that you will want to make sure that you understand what you are signing and that you get the best possible deal.

The Offer to Lease may seem harmless - after all, it's not the actual Lease (which gets prepared after the main terms of the lease are agreed upon in the Offer) - but it is actually very important to get this document right. It will form the basis upon which the Lease is drafted and, if an important term is not in the Offer, you may be out of luck when it comes to the Lease. So, what sorts of things should you be thinking about when drafting the Offer? Here are some examples:

1. Who will the Tenant be? Will you be signing personally or through your corporation? If through the corporation, will the Landlord require a personal guarantee or indemnity?

2. Do you have any special signage requirements? Do you require any leasehold improvements to be done by the Landlord? If so, write it in the Offer and be specific.

3. Are you asking for a fixturing period - a month or two that is rent free, or base rent free, in order to get your business up and running?

4. What about stepped-up rent? If you are a new business, perhaps you can negotiate lower rent in the first year in return for slightly higher rent in the following years. This can assist in keeping your overhead low while you are first starting out.

5. If you anticipate the possibility of requiring additional space, you should consider requesting a right of first refusal over adjoining space so that when it comes available, you get the first chance to lease it, if you require it.

6. If there is a provision in the Offer that states that the Tenant agrees to sign the Landlord's standard form of Lease Agreement, make sure you add: "to be negotiated by the parties, acting reasonably." After all, why would anyone agree to sign a document that they have not even seen yet, without retaining the right to negotiate its terms!

7. You may want to negotiate a right to renew the lease for another one or two terms. The wording on this right to renew is important if it is going to be worth anything to you, so, again, a lawyer is recommended. If you have invested a lot of money into leasehold improvements or if the location of your business is a key component to its success, this provision makes good business sense.

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