Why use an Offer to Lease?
Whilst it is prudent and ideal for both landlords and tenants to have obtained advice on the proposed lease arrangement before commencing negotiations, this may not always be feasible or commercially viable. Consequently, the parties may choose to negotiate the key terms and seek legal, financial and tax advice later. The benefit in this method is that it will expedite the process and highlight any ‘deal breakers’ early on.
What should be included in the Offer to Lease?
An Offer to Lease may be contain a variety of key terms, depending on the parties’ needs; however, the primary matters that should be included are as follows:
- Rent: Lease negotiations will commonly start with the parties agreeing to the rental amount. This is generally expressed as an annual amount; however, can also be described as a an amount per square meter in circumstances where the exact space has not been determined (i.e. in an offer the plan building).
- Outgoing: In most instances the premises’ outgoings will be passed on to the tenant. It is recommended that tenants have a solid understanding of the types of outgoings that will be payable, which may include rates, land tax (if not a retail shop lease), cleaning, security and gardening etc. Such disclosure is a requirement for Retail Shop Leases.
- Rent Review: The method of calculating the annual rental increases should be included in the Offer to Lease. This can be a fixed percentage, a CPI increase or market rent review (or a combination of 2 or more of these).
- Term: The tenant may agree to lease the premises for a short term (> 3 years) or long term (<3 years). One or more Options to Renew the lease may be included to allow for extensions of the original term.
- Security: In most instances, the landlord will require a bank guarantee or cash deposit in the amount of 3-6 months; however, depending on the commercial risk to the landlord, this may be a higher amount. If the tenant is a corporate entity, it is common for a directors to also provide personal guarantees.
- Incentives: The landlord may offer incentives for the tenant to lease the premises, Such incentives may include a rent free period, payment of fitout works, discounted rent etc.
- Fitout works: The tenant will require the landlord’s consent to carry out works to the premises. This should be negotiated early in the process and the details set out in the Offer to Lease;
- Permitted Use: The landlord’s agreement to lease the premises will be conditional on an ‘agreed’ or ‘permitted’ use. For the avoidance of future disputes, the parties should set out all the proposed uses and any future uses where known. For example, a dentist may wish to provide both dental and cosmetic services from the premises.
- Costs: The parties will agree on who is responsible for costs incurred in preparing, negotiating and registering the lease. These costs are often passed on to the tenant. In some situations, this is prohibited under legislation (i.e. Retail Shop Leases Act).
- Special Conditions: Either a tenant or a landlord may require a special condition be inserted into the lease, as a result of their own commercial or development needs. For example, a tenant may seek a first right of refusal if it requires security of tenure A landlord, on the other hand, may require that the tenant agree to relocation provision if it has future plans to redevelop the land.
Is an Offer to Lease binding on the parties?
Parties should be careful as the Offer to Lease may be deemed legally enforceable, if all the elements of a binding contract are present.
If a party is concerned as to whether it can be bound by an Offer to Lease, it should immediately seek legal advice before signing the document.
Ardor legal can provide support and advice to both landlords and tenants throughout the lease transaction. Contact Ardor Legal to speak to one of our experienced solicitors today.