COMMERCIAL OFFERS TO LEASE – THE ESSENTIAL TERMS

COMMERCIAL OFFERS TO LEASE – THE ESSENTIAL TERMS

By: Heather Marshall, LL.B.
Associate at Kronis, Rotsztain, Margles, Cappel, LLP
1100-25 Sheppard Avenue West, Toronto, Ontario, M2N 6S6

In commercial leasing in Ontario, it is common for parties to enter into an Offer to Lease (also sometimes called an Agreement to Lease or a binding Letter of Intent) rather than proceeding directly to the Lease. This pre-Lease documentation forms the basis of the formal Lease. Some Landlords use the Ontario Real Estate Association (OREA) form or the Toronto Real Estate Board (TREB) form, while other Landlords, especially large or institutional Landlords, have their own standard form Offer.  Some Offers are lengthy and detailed, setting out most of the fundamental terms of the lease agreement, while others are more basic setting out only the essential terms: the parties, the premises, the rent, the term and the permitted use of the premises, without which the Offer may be held to be void for uncertainty.

This article is only a brief summary of the essential terms of an Offer to Lease.  A tenant should always seek the advice of a lawyer at the offer stage.  Once the Offer is signed, the lawyer’s hands are tied.  The terms agreed to in the Offer cannot be renegotiated during the lease negotiation stage.

The Premises:
The Premises must be clearly defined and ascertainable.  This is usually accomplished by referring to a specific unit number in the building or, if the lease is for a whole building, the legal description or municipal address.  There will usually be a plan attached to the Offer with the premises cross-hatched.  If the rent is a function of the size of the premises, as is generally the case, the parties must consider whether they will simply agree on the rentable area or whether the premises will be measured by an architect or surveyor before the tenant takes possession.  It is very common for the useable area of the premises to be “grossed-up” to the rentable area, on which rent is based.  This allows the landlord to allocate the non-useable areas of the building (corridors, washrooms, utility areas, etc.) among the tenants on a proportionate basis.

The Parties:
The Parties must be correctly named. Consider conducting due diligence searches on the other party (e.g. corporate search, bankruptcy search, subsearch of title) to ensure the other party is a validly subsisting entity, not a bankrupt and, in the case of the landlord, the registered owner of the property.

The Rent:
The method of calculating rent must be clearly set out so as to avoid ambiguity or disagreement as to what costs the tenant will be responsible for. There are several different ways to calculate rent.  Rent can be gross –an “all-in” figure; semi-gross – a base rent plus a contribution (known as “additional rent”) toward the costs of operating the building, such as taxes, maintenance and insurance, which can be capped at a dollar amount, limited to certain categories of costs, subject to a set rate of escalation, or limited to costs incurred over and above a “base year”; or net – a base rent plus additional rent on ALL of the costs and expenses incurred by the Landlord in operating the building.  A tenant should always seek to limit the types of costs that are recoverable from the tenant, especially costs that can fluctuate unpredictably from year to year, such as capital costs and expenses.

The Term:
A lease must have a set term, a commencement date and an expiry date.  Usually the commencement date is fixed, but sometimes it is based on the happening of a triggering event (such as when construction of the premises is complete).  Often the tenant will have the right to extend the term or renew the lease.  The terms of the extension must be clearly set out (e.g. is it only the original tenant that can exercise the right, does the tenant have to be occupying the whole of the premises, how much advance notice must the tenant give to the landlord  in order to exercise the option, how many extension terms is the tenant entitled to and how long is each extension term, is the extension term based on the same terms and conditions as the original term, can the landlord require the tenant to sign a lease on its then standard form, what is the rent to be paid during the extension term).

The Tenant’s Permitted Use:
The tenant’s permitted use must be specifically set out, including any incidental uses.  A tenant will want to describe its permitted use as widely as possible to allow it to expand its business, while a landlord will always try to limit the use that the tenant can make of the premises to enable it to lease space in the building to a variety of businesses. A retail tenant should consider requesting an exclusive use right or a restrictive covenant from the landlord which would prohibit the landlord from leasing other space in the building to a tenant who has the same or a similar use as the tenant.

Other Material Terms:

There are many other terms that may be included in the Offer.  If they aren’t included in the Offer, they will generally be found in the Lease.  A tenant would be wise to deal with these terms when negotiating the Offer because that is when the tenant has the most bargaining power. Such terms can include:

• Any tenant inducements, such as a rent-free fixturing period, tenant allowance or work to be done to the premises by the landlord
• Whether any advance rent and/or security deposit is to be paid by the tenant
• Any restrictions on the tenant’s ability to assign the lease (which may include a “change of control” of the tenant) or sublet the premises, what factors the landlord may consider in either accepting or denying the tenant’s request for a transfer, whether the tenant remains liable upon an assignment of the lease, and any right the landlord may have to terminate the lease upon the tenant requesting the landlord’s consent to a transfer
• The landlord and tenant’s insurance obligations – this should always be submitted to and reviewed by a tenant’s insurer to ensure the tenant can obtain the required insurance coverage on the required terms at commercially reasonable rates
• Any radius clause prohibiting the tenant from operating the same business within a certain geographic boundary
• Whether the tenant is required to remove its leasehold improvements at the end of the term and restore the premises to its original condition
• Whether the landlord is entitled to terminate the lease early if it desires to sell or demolish the building
• Whether the tenant has any rights of first refusal to lease adjoining space in the building or to purchase the building from the landlord
• Whether the landlord is entitled to relocate the tenant to other premises in the building and on what terms
• Whether the tenant has a right to exclusive or reserved parking
• The tenant’s signage rights (including the right to a space on the pylon sign and whether any additional rent will be charged)
• The tenant’s right to make alterations and improvements to the premises during the term, and the conditions thereof
• What happens in the event the building or the premises are damaged or destroyed
• Whether the landlord can force the tenant to subordinate to a subsequent mortgagee and whether the tenant can demand a non-disturbance agreement in return
• The landlords’ rights and remedies on default and what constitutes a default
• The form of lease to be used, the deadline for signing it and whether it can be negotiated
• Any representations or warranties given by one party to the other (e.g. the premises are zoned to allow the tenant’s permitted use, the condition of the lands and the building or any part thereof for which the tenant is responsible)