Case Notes

When is the Right Time to Consult your Lawyer on a Deal to Lease New Commercial Premises?

By Tom Marlay

Typically, a leasing deal begins with the offer to lease. In Canada the offer to lease is often completed by the landlord and prospective tenant, usually with the assistance of the tenant’s real estate agent, or perhaps agents for both parties. In this scenario, the signed offer is later passed to the tenant’s lawyer for review and for negotiation of the lease itself.

This practice works against a tenant’s interest almost 100% of the time. The reason is that, except in the case of very powerful tenants, the base lease document used will be the landlord’s standard form of lease. These vary from being very pro-landlord to extremely pro-landlord. There is no other kind.

The offer might say that the lease will be in the landlord’s standard form of lease, modified to incorporate the terms of the offer. But the offer will only deal with basic business terms. The lease will be much longer and deal with many other important matters. It is a sad tenant who brings such an offer to his or her lawyer only to find that the deal is done. There is no negotiation left to do. All the lawyer can do is advise the client how well or poorly the lease serves the tenant’s interests, but that is it. The answer is most likely to range from barely tolerable to wildly unfair to the tenant.

But, you might say, the offer provides that the lease will be in the landlord’s form “subject to such reasonable changes as the parties agree upon.” The problem with this is, as at least one Ontario court has held, if there is no change agreed upon, then the lease will be the landlord’s standard form and we are right back to our first scenario.

Possibly worse, the offer might say “subject to such changes as the parties may agree upon, failing which this offer to lease shall be deemed to be the lease.” The problem here is that much of what is ordinarily in a lease will not be included in the offer, so there will be no provisions to govern the many issues that may arise. This is a formula for disaster. There are no implied covenants in a commercial lease, unlike a residential lease where almost everything is governed by the applicable provincial law. Not having these matters dealt with at all can lead to costly disputes respecting, for example, the obligation to repair the structure of the building. Tenants assume that the landlord must do that, but virtually nothing is implied in a commercial lease. The landlord may ignore the need for the structural repairs.

A better approach is to have a clause in the offer that reads “subject to such changes as the parties may agree upon within 15 days of the date of this offer, failing which this offer to lease shall be deemed to be void.” That puts some pressure on both parties to be reasonable or the deal will simply not happen.

An even better approach is to have a legal review of the offer, before it is signed. There are three principal reasons for this. First, once the offer is signed, there is a very clear psychological shift in landlords’ thinking and they simply are not as open to negotiating things as they are at the offer stage, still trying to land the deal. Perhaps more importantly, the lawyer will know the tenant’s business and can suggest clauses to be added to the offer that address the specific needs of that business.

Finally, the clauses that are used in offers to deal with the execution of the lease are so varied and so often badly written that litigation results when the parties cannot agree on the lease provisions. By that point the tenant may desperately need the premises and the landlord is losing rent. Costly and time-consuming litigation is not good for either landlord or tenant.

The very best approach, which is sometimes possible, is to go directly to the lease. This makes some parties nervous; they worry they will not have a deal. But if both parties give it priority, a lease can be negotiated very expeditiously.

So, what is the best practice? Consult your legal counsel when negotiating the offer. Do not wait until the negotiation of the actual lease to undertake legal review. And, where possible, skip the offer, and have your lawyer negotiate the lease.