Things You May Not Know About Your Offer to Lease

Tenants beware! Signing an Offer to Lease on a property can result in a binding agreement, even if the parties do not then agree on the terms of the official lease. This blog post will explain why Offers to Lease may result in a binding agreement, and when they don’t result in a binding agreement.

Generally, when a prospective tenant wishes to apply to enter into a lease with a landlord, the landlord or its agent provides a document called an Offer to Lease for the tenant to complete.

This document sets out the particulars and terms of the lease, including any special conditions that are to be included in the lease. Such particulars include, for example, details of the parties, the permitted use of the premises, the term of the lease and any option terms, rental and outgoings, security deposit, rent reviews, and special conditions.

While the Offer to Lease is initially prepared by or on behalf of the landlord, the document represents the offer made by the tenant which is then to be considered by the landlord. A tenant is often required to also pay a deposit when making the Offer to Lease.

Once the Offer to Lease is accepted by the Landlord, the formal lease documents are prepared for execution.

Is an offer to lease legally binding?

Many people do not realize that an Offer to Lease can be construed as a legally binding document. One would need to consider the circumstances surrounding the making of the Offer to Lease to determine whether the Offer constitutes a legally binding contract.

The law identifies four types of situations where negotiating parties reach some form of a preliminary agreement with a view to then finalizing a formal contract, which also applies to an offer to lease pending the formal lease documents:

1. All terms of the lease are agreed as set out in the Offer to Lease and the parties intend to be bound to by the Offer to Lease and perform to terms of the document but wish to reaffirm the terms in a formal Lease. If this occurs then the Offer to Lease is binding.
   
   
2. All terms in the Offer of Lease have been agreed upon, and the performance of all or part of the agreement is subject to signing the formal lease. If this occurs then the Offer to Lease is also binding.
   
   
3. If the parties do not intend to make a final agreement pursuant to the Offer to Lease, until a formal lease is signed then the Offer to Lease is not binding.
   
   
4. If the parties have agreed on key terms in the Offer to Lease that are to be performed immediately pending negotiation of the remaining terms in a formal lease, then the agreement is binding and replaced by the detailed terms of the formal lease. If the detailed terms of the formal lease cannot be agreed upon, then a court may determine the remaining terms.

It is therefore dependent on the circumstances of each matter as to whether an Offer to Lease is binding. However, generally where the usual elements of a contract are satisfied, Offers to Lease are usually considered to be legally binding.

Accordingly, it is paramount that the parties ensure that all of the provisions within the document are in accordance with the terms of the formal lease document, as the formal lease will be prepared based on the provisions of the Offer to Lease.

The parties should particularly consider the following issues before signing an Offer to Lease:

1. The proposed use of the premises and whether the premises complies with Council planning laws;
2. Whether the lease will be a commercial lease or a retail shop lease. This is also particularly relevant when assessing which outgoings the landlord is able to pass on to the tenant under the Retail Shop Leases Act.
3. The base rent payable;
4. Rent review process;
5. The outgoings payable, including what the outgoings are and how such outgoings are calculated;
6. Whether landlord’s fixtures/fittings are offered with the premises;
7. Term of the lease and any options;
8. Security deposit;
9. The deposit payable upon signing the lease and whether the deposit is deducted from the first month’s rent;
10. What other costs are associated with the lease, for example, whether the tenant is required to pay the landlord’s legal fees relating to the preparation of the lease and any registration fees (again, this is also dependant upon whether the lease is a retail shop lease);
11. Any works to be provided by the tenant or landlord prior to the commencement date of the lease;
12. Any rent-free period or incentives;
13. Whether there is a demolition or relocation clause in the lease.

The list is not exhaustive and the parties should obtain various advice from experts to determine what matters should be discussed, depending on the use of the premises and the state of the premises itself.

Conclusion

To summarise, signing an Offer to Lease may result in a legally binding agreement. It’s important to understand the different circumstances that may affect whether an Offer to Lease becomes binding or not. If you need any help with leasing a property, please contact our team today.