Entering into a commercial lease agreement is one of the most important decisions a business will make. Commercial leases are typically for an extensive term and often involve initial financial outlays and longer-term commitments on the part of both landlord and tenant.
As a result, it is important for parties, when beginning the process of negotiating a commercial lease, to be aware of the implications of entering into an offer to lease, or term sheet (the “Offer to Lease”), as it sets the stage for an eventual final lease agreement (the “Lease”). Parties often believe they are still negotiating or in the discussion phase upon the signing of an Offer to Lease, with the preparation of the formal lease to be prepared subsequently. However, depending on the circumstances, a party may find themselves bound to a commercial lease arrangement on the terms outlined in the Offer to Lease despite no Lease being yet executed.
When parties enter into an Offer to Lease but fail to conclude a final Lease, that the parties may disagree as to whether a formal contract was concluded by virtue of the Offer to Lease. In this case, a Court may be asked to determine whether the parties intended the Offer to Lease to merely reflect a transaction that has already been agreed upon or whether the execution of a further contract is a condition precedent to the arrangement the parties have negotiated. All cases are fact specific, but generally speaking, in the former case, the Court will conclude the Offer to Lease is nonetheless a binding contract between the parties. In the latter case, the Court is likely to find there was no consensus ad idem reached between the parties and the Offer to Lease is not binding.
In its analysis of whether a contract was concluded, the Court will consider the fundamental aspects of contract law, including the following:
- Are the lessor and lessee identified?
- Are the leased premises sufficiently described?
- When will the term commence and for how long?
- Is the “consideration” or rent stated clearly?
If these terms have been agreed upon in the Offer to Lease, it is likely the parties have concluded a contract, and do not have merely an agreement to agree, despite the fact no Lease was concluded. If any of the above terms have not been agreed upon, a Court may determine that the parties did not come to a concluded contract and no one is bound to the Offer to Lease.
In many cases, the terms of the Offer to Lease may clearly state it is meant to be binding with a clause such as the following: “This offer to lease upon being accepted by the Tenant will constitute a binding agreement between the parties.” While this will not be determinative if other elements of a contractual arrangement are missing, it certainly will be strong evidence that the parties intended to be bound by the arrangement as set out in the Offer to Lease. Likewise, where the Offer to Lease states it is intended to be non-binding, a party may still be bound to the Offer to Lease if, among other factors, including those described above, the parties have begun acting as though a proper deal was concluded.
The consequences of getting cold feet about a leasing arrangement can be problematic if the Offer to Lease is found to be binding upon the parties. A finding that the parties are bound to the Offer to Lease would mean that they are now obligated to fulfill their obligations with respect to the terms set out therein. This will likely result in the tenant being required to pay rent and not abandon the premises. An abandonment would be a repudiation of the Lease, entitling the landlord to terminate the Lease and claim for damages for the balance of the rent payable. Subject to mitigation, the landlord is also entitled to any other damages suffered as a result of the repudiation.
The commercial leasing team at Carscallen LLP can assist you and your business with considered and helpful leasing advice. Commercial leases are long and complicated documents with various clauses that may have a large impact on your relationship with the other party to the lease and the success of your business. Our team can assist you with negotiation and review of your commercial lease to help you avoid a situation where you are unknowingly locked into a commercial lease agreement.*This update is intended for general information only on the subject matter and is not to be taken as legal advice.