Okay here we are at the fun part, lease documents. If you are at the document stage that means you have found a property that will work for you and you want to try and lease it. The bad news is that lease documents get very lengthy and cumbersome full of endless clauses written in boring legalese. Regardless of whether you are a landlord or a tenant, it is of utmost importance that you read that document carefully and you waste, I mean invest, a bunch of money having your lawyer review it also. You should never enter into a lease without having your lawyer review it first. So with that caveat, let’s have a look at the various documents you may or may not encounter.
The first document you may encounter is the Letter of Intent. This is probably the most variable document in the process; sometimes it is used and sometimes it isn’t. So what is an LOI and why is it sometimes used and sometimes not?
The lease negotiation process can be quite lengthy and complicated, and go on for weeks or even months in extreme cases so there is no use wasting that much time if the parties don’t at lease agree on the most important terms in a lease. For that reason, an LOI is a short, non-binding (usually) document that spells out the major items (you guessed it, money) such as amount of rent, amount of operating costs, length of term, and any Landlord financial incentives to the tenant. If the parties agree on these major terms then there is a much greater likelihood that they will successfully negotiate a lease and so they then proceed with the next document, the Offer to Lease.
So the benefits of using an LOI is that it saves a lot of time wasted negotiating leases that will never come together. The LOI is also non-binding so this is an advantage if you are the landlord and a disadvantage if you are a tenant because the landlord is still able to accept other offers/LOIs. The non-binding nature of an LOI does have one major drawback to both parties and that is that there is a small chance a court could find it binding. The law is never black and white and courts make some pretty unexpected decisions sometimes. I recently read of a court case where the court decided that an LOI was indeed binding even though it specified that it wasn’t. So always beware when using LOIs. Never forget that who wins in a legal battle is really of little consequence. The main thing to remember is that the property is tied up for months or even a year or more in extreme cases and so is your wallet and your future while you duke it out in court. That being said, legal fights over an LOI are very uncommon and as long as your lawyer is involved the risk of a problem is very very low.
The Offer to Lease
The next document you will encounter (and sometimes the first) is the Offer to Lease. The OTL is a binding document but it is not the final document. The OTL spells out the terms and conditions of the offer in much more detail than the LOI and IS a binding document once agreed to by both parties.
The OTL will go into detail on things like parking, detailed breakdown of expenses and who pays them, rent calculations including things like percentage rent or rent escalations (commercial lingo for rent increases), rentable area, useable area, access, hours of operations, etc., etc., etc.
Since it is a binding document it is of utmost importance to have proper conditions to protect you. Some common conditions are;
Approval of tenant’s financial status
Approval of tenant’s use
Approval of board of directors (for large landlord firms)
Approval of Landlord’s Standard Lease (don’t ever forget this one!!)
Approval of financing (for tenant improvements, operating capital, whatever)
Approval of development and building permits by Municipality
Approval of business permit by Municipality
Approval of build-out costs (contractor will estimate costs)
There are many more possible conditions and your real estate agent can help you determine which conditions to add in, these are just some of the more common ones. Once both parties agree on the OTL the next (and usually final) document is the Landlord’s Standard Lease.
Landlord’s Standard Lease
The Landlord’s Standard Lease, just called The Lease usually is the most important document of all as it is usually very lengthy and often contains very important clauses hidden in the middle of the document. From the tenant’s perspective, remember there is no such thing as a Standard lease. Every lease is different and don’t let the word Standard intimidate you. Every clause is negotiable and it is best to discuss the lease with your real estate agent and your lawyer before signing. Once you sign this document it is done. You are bound to every term and condition in it.
From the tenant’s standpoint, make sure that the Lease properly reflects what was negotiated in the OTL. It is not unheard of for the Lease to not properly reflect the terms and conditions negotiated in the OTL.
So how much can be negotiated? Well technically a tenant could entirely re-write a landlord’s lease but in reality how negotiable it is depends on which party has more power in the process. For example if you are a just opening your first retail store and you managed to convince the Landlord of a major regional mall to let you lease, you will have very very little negotiating power. On the other side of the equation, when companies like Wal-Mart lease space they will present their standard lease to the Landlord and the Landlord will likely have very little negotiating power. Often the landlord and tenant are somewhat matched and some of the most important clauses can be negotiated, but more often the landlord does have the edge. Of course this also changes as the market changes. The more lease space available the more power tenants have and vice-versa.
So there you have it, the most common lease documents you will encounter in leasing property. While there may only be two or three documents in your negotiation process, each one is very important and be sure to have proper professional assistance along the way.
In our next installment in the series we will address;
SMALL LEASES: PART V - IMPORTANT LEASE CLAUSES