Occasionally, we are asked whether or not a commercial offer to lease is binding. This typically arises when one of the parties wants to “get out” of the offer. Assuming that any subject conditions have been satisfied, an offer will generally be binding provided these four essential elements have been settled: parties, premises, rent and term.
1. Parties: The parties to the lease must be clearly identified.
It is possible that one party may not exist at the time that the offer is signed. However, so long as there is a mechanism for identifying that party (eg: “Jim Brown on behalf of a company to be incorporated”) the offer is enforceable. Care must be taken to ensure that the correct legal names of the parties are used. At times, an indemnifier may be required and the correct legal name must be identified as well.
2. Premises: The premises which will be leased must be identified.
If they do not currently exist (eg: a building under construction), the offer must contain provisions for identifying the premises when they come into existence. Often the premises are described in terms of the unit, the location, and/or the rentable area, in which case the method of measuring rentable area also becomes important.
3. Rent: The rent payable for the premises must be set out.
Most commercial leases have both a “base rent” and an “additional rent” component. The “base rent” is usually set out as a rate per square foot. The “additional rent” largely covers operating costs and taxes. The additional rent on some retail leases may consist of a “percentage rent” component, set out as a percentage of gross sales. For an offer to be binding, it must clearly set out how these rentals will be calculated and determined.
4. Term: The term of the proposed lease must be determined.
During the term, the tenant will have exclusive possession of the premises (subject to the terms of the lease), therefore the commencement date of the term and the expiration date of the term are important. If the commencement date is not known at the time the offer is signed there should be a mechanism for determining when the term will commence, in order to meet this essential element (eg: 30 days after the landlord notifies the tenant that the premises are ready for the tenant’s occupancy).
Provided all four essential elements have been satisfied, the offer will generally be considered binding and enforceable.
Of course, there are many other terms which form part of a standard commercial lease including proposed use of the premises, physical condition of the premises, inducements, insurance and indemnity, maintenance and repair, assignments and subleases as well as default provisions. It is always advisable to have a lawyer review the offer, before it is signed, and certainly before removing subject conditions.