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.
See our articles ‘Finding Good Faith in Basic Contract Law‘ and ‘Mitigating Business Risks Through Contract Language‘ for more information on clear contract language.
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.
Need advice on commercial lease offers? Contact Boughton Law’s Peter J. Anderson and Serene S. Y. Chow for comprehensive legal support throughout the commercial leasing process.
FAQs
The essential elements of a lease are as follows: Parties- The parties to a lease are the lessor and the lessee. The lessor is also called the landlord and the lessee the tenant. Subject matter of lease- The subject matter of lease must be immovable property.
What are the elements of a lease? ›
The essential elements of a lease are as follows: Parties- The parties to a lease are the lessor and the lessee. The lessor is also called the landlord and the lessee the tenant. Subject matter of lease- The subject matter of lease must be immovable property.
Which of the following are the important elements of a lease contract? ›
5 Key Lease Agreement Clauses to Safeguard Tenants
- #1 Security Deposit Clause. ...
- #2 Right to Quiet Enjoyment. ...
- #3 Repair and Maintenance Clause. ...
- #4 Termination Clause. ...
- #5 Rent Payment Clause.
The list below introduces you to the most common lease clauses.
- Parties. ...
- Premises Clause. ...
- The Use Clause and Exclusive Clause. ...
- Term Clause. ...
- Rent. ...
- Security Deposits. ...
- Improvements and Alterations. ...
- Maintenance, Utilities, and Code Compliance.
Rents consist of 3 components: base rent, base rent escalations, and percentage rent. Percentage rent, also known as overage, is unique to retail rents and specifies the percentage of the tenant's gross revenue that a landlord receives in addition to the base rent and escalations.
What are the essential elements of leasehold interests? ›
The main elements of a leasehold estate include the term or length of the lease, the consideration (such as rent or other payments that the tenant must make in exchange for use of the property), and any restrictions or conditions on how the property can be used.
What are the principal elements of lease payments? ›
The principal payment is the difference between the actual lease payment and the interest expense.
Which of the following lists the four essential elements of a contract? ›
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.
What are the main essential elements of a contract? ›
For a contract to be valid and recognized by the common law, it must include certain elements-- offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.
What key factors are important in a good lease? ›
Negotiating your lease terms
- The cost of the vehicle.
- The estimated value of the car at the end of the lease, also called the residual value. ...
- Amount of a down payment.
- Value of the trade-in of your current vehicle.
- Rental charge or money factor.
- Mileage limit.
- Purchase option.
A Standard Clause for use in a commercial lease giving the tenant a right to terminate the lease if the tenant cannot obtain the government permits, licenses, and approvals necessary to operate its business at the premises.
Can you break out of a commercial lease? ›
Generally a commercial lease is only able to be terminated at the agreed termination date, other than situations like expiry of a 'no access' period after an emergency. Once tenants understand their obligations under the lease, the next step is to discuss options with the landlord.
What is the most common type of commercial lease? ›
1. Gross Lease. Gross leases are most common for commercial properties such as offices and retail space. The tenant pays a single, flat amount that includes rent, taxes, utilities, and insurance.
What information should a lease contain? ›
In most cases, the lease agreement will outline the terms of the renter's tenancy, including the length of time they're renting, the upfront fees they'll pay, the monthly rental amount, and the rules and regulations governing the property's use.
Which components of a lease are likely to be most negotiable? ›
Length of a lease: It is possible to negotiate the length of time that a landlord sets for a lease, especially if the tenant is willing to pay a higher rate. Security deposit amount: It's possible to negotiate the amount of security deposit if one is a good tenant.
What is the retail lease structure? ›
Under retail leasing, there are two parties the landlord (Lessor) and the businessman or the tenant (Lessee). The terms and conditions of the lease are outlined in a document known as a ” Lease Agreement”. Retail Leasing is most common in the case of leasing commercial buildings, malls, shopping centers, etc.
What are the five items needed to calculate a lease? ›
First, let's look at the basics - the five figures you'll need in order to calculate a monthly lease payment:
- Residual Value = (MSRP) x (Residual Percentage)
- Monthly Rent Charge = (Adjusted Capitalized Cost + Residual Value) x (Money Factor)
- Total Monthly Lease Payment = Monthly Depreciation + Finance Charge + Tax.
Their purpose is to outline the rights and responsibilities of both parties when renting property. There are basic elements that must be included in every lease: Names and contact information. Start and end date of the lease.
What is a lease structure? ›
A lease structure often depends on the landlord's preference and what is common in the market place. Some leases push all the expenses to the tenant's side of the ledger, while other leases push all the expenses to the landlord's side; and then there are many lease types in the middle.
