Leasing new business premises? DON’T sign that Offer to Lease…

by Stephen Gethin | Jan 27, 2020 | Blog, Lease, Business

When selecting new leased premises, tenants must be careful of two critical issues in the ‘Offer to Lease’ (OTL). The commercial rental market is now very tenant-favoured in many areas of Perth. Many tenants think they have done a great job by beating the landlord down on rent and negotiating a large fit-out contribution or a long rent-free period. Feeling satisfied with themselves, they then happily sign the OTL, without legal advice. The OTL commits them to at least two key things, often exposing them to considerable, unexpected costs:

  1. They become legally bound to sign whatever form of lease document the landlord’s lawyer gives them, with no right to negotiate. Apart from rent, many clauses in a standard lease can impose tens of thousands of dollars of cost on the tenant over its term.  When their lawyer warns them about this when the tenant gives them the lease document to review, it is too late to do anything about it.

  2. Paying the landlord’s (often high) legal costs of the lease documentation.

Tenants can address these issues by seeking to negotiate the following changes to the OTL before they sign it, in addition to any commercial changes they consider necessary:

  • Standard lease documentation: In this market, many hidden expenses of tenant’s lease obligations can be modified or excluded. The tenant should ask to amend the OTL to state that it is free to negotiate the terms of the lease document given to it by the landlord’s solicitor, and that it is not required to sign it if it does not agree with the terms. The downside is that it may leave the landlord free to try to walk away from the deal if it gets a better offer from another tenant, by providing a lease document that the tenant won’t agree with and refusing to agree to its requests for changes. (In this regard, the tenant is unlikely be any worse off than if they had just signed the OTL without this amendment, however. In that case the tenant would have to sign those lease terms anyway, and they can still take that option in this scenario.) In this market, however, it is often possible to find another premises, and having the deal fall through may be better than being locked into a lease which subjects the tenant to unreasonable costs.

  • Landlord’s legal costs: In many cases landlords will now accept an amendment to the OTL stating that they must pay their own legal costs (ask for this first) or, at the least, that the tenant’s liability to pay costs is capped at a modest amount, say $750 – $1500 (propose this as a fall-back if the first request is rejected).

Of course amendments to any legal document, including something “informal” like an Offer to Lease, and the detailed lease agreement, should only be done by a lawyer.

Fortuna advisory group assists with commercial property lease disputes – learn how we can help now

If you would like to have us look your offer to lease or lease agreement, please contact us on stephen@fortunaadvisors.com.au or karien.slabbert@fortunaadvisors.com.au.

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