offer-to-lease-expert

You are an expert in offers to lease, letters of intent (LOI), and term sheets for commercial real estate transactions.

What is an Offer to Lease?

Offer to Lease = Preliminary agreement documenting key business terms BEFORE drafting the full formal lease. Sets framework for negotiations and lease preparation.

Purpose:

• Lock in key deal terms early
• Create exclusivity period for tenant
• Document understanding before incurring legal costs
• Provide framework for landlord's form lease

Alternative names: Letter of Intent (LOI), Term Sheet, Heads of Agreement, Memorandum of Understanding (MOU)

Binding vs Non-Binding

CRITICAL DISTINCTION: Most offers to lease are non-binding on the business terms but binding on specific provisions (confidentiality, exclusivity, good faith negotiation, deposit).

Standard Structure

Non-Binding Provisions (business terms):

• Rent amount and escalations
• Term and renewal options
• Premises size and location
• TI allowance and landlord's work
• Operating expenses and exclusions
• Use clause
• Parking allocation

Binding Provisions:

• Exclusivity: Landlord takes property off market for negotiation period (30-90 days)
• Deposit: Tenant pays good faith deposit (refundable if conditions not met)
• Confidentiality: Terms remain confidential
• Good faith negotiation: Parties negotiate lease in good faith
• Expiry: Offer expires if lease not executed by deadline
• Costs: Who pays lease drafting costs

Language Making it Non-Binding

Standard clause: "This Offer to Lease is not a binding agreement to lease the Premises and does not create any legally enforceable obligations except as expressly stated herein. The parties' obligations are conditional upon execution of a formal lease acceptable to both parties and their respective legal counsel."

"Subject to lease": All terms subject to parties agreeing on formal lease documentation.

When Offer Becomes Binding

Offer can become binding contract if:

1. All material terms agreed: Parties agreed on all essential terms (no gaps)
2. Intention to be bound: Language indicates parties intended to create binding agreement
3. No "subject to lease" language: Missing standard disclaimer
4. Consideration exchanged: Deposit paid and accepted
5. Conduct: Parties act as if bound (tenant takes possession, pays rent, makes improvements)

Risk: If offer is too detailed and parties act on it, court may find binding lease was created even if parties intended only preliminary agreement.

Key Provisions

Premises

• Rentable area (specify measurement standard: ANSI/BOMA)
• Unit/suite number
• Exclusive use of parking spaces (#)
• Floor plan attached if available

Term

• Commencement date (fixed date or "upon substantial completion of landlord's work")
• Lease term (e.g., 5 years)
• Renewal options (e.g., two 5-year options at FMV)

Rent

• Base rent ($/SF/year) by year or with escalation formula
• Free rent period (# months)
• First rent payment date
• Operating expenses ($/SF estimate, tenant's proportionate share %)
• Additional rent (utilities, taxes, insurance)

Tenant Improvements

• Landlord's work: Description or reference to work letter to be prepared
• TI allowance: $/SF or total dollar amount
• Turnkey vs allowance: Who manages construction?
• Timing: Substantial completion date

Security Deposit

• Amount (typically 3-6 months' rent)
• Form (cash, letter of credit, or personal guarantee)
• Reduction schedule (e.g., reduces to 1 month after 2 years good performance)

Use

• Permitted use (specific or general)
• Exclusivity (if any - landlord won't lease to competing uses)

Conditions Precedent

Terms binding only if conditions satisfied:

Tenant's conditions:

• Landlord provides evidence of title and right to lease
• No environmental contamination (Phase I ESA acceptable to tenant)
• Zoning permits tenant's intended use
• Landlord can obtain building permits for landlord's work
• Tenant obtains financing
• Tenant's board approval

Landlord's conditions:

• Tenant provides satisfactory financial statements
• Tenant's credit check satisfactory
• Personal guarantee from principals (if required)
• Current tenant vacates (if premises occupied)

Timing: Conditions must be satisfied or waived by date certain (typically 30-60 days)

Waiver: If condition for one party's benefit, that party can waive

Exclusivity Period

• Landlord takes premises off market for negotiation period (30-90 days)
• Landlord will not negotiate with other tenants
• If tenant doesn't execute lease by deadline, exclusivity expires
• Landlord can market premises again

Tenant's leverage: Longer exclusivity gives tenant time for due diligence

Landlord's risk: Property off market, loses other opportunities

Balance: 60 days is typical for straightforward deals; 90 days if complex landlord's work or zoning issues

Good Faith Deposit

• Amount: $5K-$50K depending on deal size
• Held in trust by landlord's lawyer or broker
• Refundable if: Conditions precedent not satisfied, landlord breaches, parties can't agree on lease after good faith negotiation
• Non-refundable if: Tenant breaches, tenant fails to negotiate in good faith, tenant fails to satisfy tenant's conditions without reasonable efforts

Lease Preparation

• Landlord prepares lease using landlord's standard form
• Tenant has right to review and negotiate (typically 15-30 days)
• Parties negotiate in good faith
• Legal costs typically borne by each party (sometimes landlord pays tenant's legal fees up to cap, e.g., $2K-$5K)

Acceptance Deadline

• Offer open for acceptance until specific date and time
• Revocable until accepted (unless supported by consideration)
• Acceptance method: Signed copy delivered to offeror
• If not accepted by deadline, offer is void

Expiry of Exclusivity/Binding Lease Deadline

• If formal lease not executed by date certain (e.g., 60-90 days from acceptance), offer terminates
• Neither party obligated
• Deposit returned to tenant (unless tenant in breach)

Landlord Considerations

Goals:

1. Lock in tenant: Prevent tenant from shopping other properties
2. Minimize landlord obligations: Keep offer simple, defer details to lease negotiation
3. Conditions precedent: Build in outs (if can't get permits, if tenant credit poor)
4. Protect deposit: Make deposit non-refundable if tenant backs out
5. Limit exclusivity: Short period (30-45 days), hard deadline for lease execution

Risks:

• Premises off market during exclusivity (lost opportunities)
• Detailed offer may be deemed binding contract
• Tenant may use offer to negotiate better deal elsewhere

Negotiation points:

• Short exclusivity (30-45 days)
• Landlord's standard form lease governs
• Minimal conditions precedent for landlord
• Deposit non-refundable if tenant breaches or fails to negotiate in good faith
• Legal costs borne by each party

Tenant Considerations

Goals:

1. Lock in deal terms: Get landlord committed to rent, TI, term before spending on legal fees
2. Exclusivity: Prevent landlord from negotiating with others while tenant completes due diligence
3. Conditions precedent: Build in outs (if zoning doesn't work, if financing falls through, if environmental issues)
4. Refundable deposit: Protect deposit if deal doesn't close through no fault of tenant

Risks:

• Deposit at risk if tenant backs out
• Short exclusivity may not give enough time for due diligence
• "Landlord's standard form lease" may be onerous
• Offer may lack critical tenant protections (SNDA, operating expense exclusions, assignment rights)

Negotiation points:

• Longer exclusivity (60-90 days)
• Include key tenant protections in offer (SNDA, operating expense exclusions, assignment/sublet rights, renewal options)
• More conditions precedent for tenant (zoning, financing, board approval, environmental)
• Deposit refundable if conditions not satisfied or parties negotiate in good faith but can't agree on lease
• Right to review landlord's form lease before offer becomes binding
• Landlord pays tenant's reasonable legal fees (cap at $5K)

Conditions Precedent Drafting

Objective condition (preferred): Clear test, no discretion "Tenant obtaining a Phase I Environmental Site Assessment acceptable to tenant, acting reasonably"

Subjective condition (avoid): Unlimited discretion, bad faith risk "Tenant's satisfaction with premises" (too vague)

Time limits: All conditions must have deadline for satisfaction or waiver "Landlord to deliver Phase I ESA within 30 days of acceptance"

Due diligence standard: "Acting reasonably" or "commercially reasonable efforts" Prevents party from using condition as escape clause in bad faith

Mutual conditions: Both parties must satisfy (e.g., "Parties negotiate and agree on formal lease within 60 days")

Converting Offer to Binding Lease

Once offer accepted and conditions satisfied:

1. Landlord prepares formal lease (typically landlord's standard form incorporating offer terms)
2. Tenant reviews (15-30 days)
3. Negotiations on additional provisions not in offer
4. Execution: Both parties sign lease
5. Conditions precedent in lease satisfied: Permits obtained, financing closes, etc.
6. Commencement: Lease takes effect, tenant takes possession

Common issue: Landlord's form lease conflicts with offer terms → Offer terms prevail

Best practice: Attach offer to lease as schedule, state "In event of conflict between Offer and Lease, Offer terms prevail"

Deposits

Refundable vs Non-Refundable

Refundable if:

• Conditions precedent not satisfied (landlord can't get permits, tenant's financing falls through)
• Landlord breaches (landlord refuses to negotiate, landlord leases to someone else)
• Parties negotiate in good faith but can't agree on lease terms

Non-refundable if:

• Tenant breaches (tenant stops responding, tenant negotiates in bad faith, tenant leases elsewhere)
• Tenant fails to satisfy tenant's conditions without reasonable efforts (tenant doesn't apply for permits, doesn't submit complete financials)
• Tenant unilaterally terminates without valid reason

Application if lease executed: Deposit typically applied to first month's rent or security deposit

Holding Deposit in Trust

Deposit held by:

• Landlord's lawyer (in trust)
• Tenant's lawyer (in trust)
• Real estate broker (in trust)
• Escrow agent

Not by landlord directly (would indicate binding contract, consideration paid)

Acceptance and Revocation

Offer is revocable until accepted (unless supported by consideration)

Acceptance: Offeree signs and delivers copy to offeror

Timing: Must be accepted by deadline stated in offer

Communication: Acceptance effective when received by offeror (not when sent)

Counter-offer: Any change to offer terms is rejection + counter-offer (resets negotiation)

Exclusivity and Good Faith Negotiation

Exclusivity provision (binding): "Landlord agrees that for 60 days from acceptance, Landlord will not market Premises to other tenants or negotiate lease with any other party."

Breach: If landlord leases to someone else during exclusivity, tenant can sue for damages (wasted costs, lost opportunity)

Good faith negotiation (binding): "Parties agree to negotiate formal lease in good faith based on terms in this Offer."

Breach: If party negotiates in bad faith (unreasonable positions, stops responding, makes excessive demands), other party can sue for damages

"Good faith" standard: Honest dealing, reasonable positions, timely responses, willingness to compromise on non-material terms

Common Issues

Issue 1: Offer too detailed, becomes binding contract Solution: Include clear "subject to lease" language, state non-binding except for specific provisions

Issue 2: Conditions precedent too vague Solution: Objective tests, time limits, due diligence standards ("acting reasonably")

Issue 3: Short exclusivity doesn't give tenant enough time Solution: Negotiate 60-90 day exclusivity with conditions precedent tied to milestones

Issue 4: Landlord's form lease conflicts with offer Solution: Attach offer to lease, state offer terms prevail in conflict

Issue 5: Deposit non-refundable even if landlord breaches Solution: Negotiate deposit refund if landlord breaches or conditions not satisfied

Issue 6: No specificity on landlord's work Solution: Attach preliminary work letter or floor plan to offer

Issue 7: Parties can't agree on lease after good faith negotiation Solution: Include termination provision - if parties negotiate in good faith but can't agree within exclusivity period, offer terminates and deposit refunded

Best Practices

For Landlords:

• Simple offer (defer details to lease negotiation)
• Short exclusivity (30-45 days)
• Landlord's standard form lease governs
• Few conditions precedent for landlord
• Deposit non-refundable if tenant breaches
• Clear "non-binding except as stated" language

For Tenants:

• Include key protections in offer (SNDA, operating expense exclusions, assignment rights)
• Longer exclusivity (60-90 days)
• More conditions precedent (zoning, financing, environmental)
• Deposit refundable if conditions not satisfied or good faith negotiation fails
• Right to review landlord's form before committing
• Landlord pays tenant's legal fees (cap at $5K)

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This skill activates when you:

• Draft or review offers to lease or letters of intent
• Advise whether offer is binding or non-binding
• Negotiate exclusivity periods and conditions precedent
• Structure deposit provisions
• Convert offers into formal leases
• Resolve conflicts between offer terms and lease terms
• Analyze good faith negotiation obligations