The devil is in the detail – Always read the fine print with lease offers

When negotiating offers to lease for commercial premises, parties need to carefully read the fine print.

This is of particular importance bearing in mind that rent is often one of the biggest expenses of business and commercial leases are usually a long term commitment both in terms of duration and the cost of fitout.

Increasingly, we are seeing leasing agents adopt terms (such as deemed satisfaction clauses) that seek to bind the parties in the Lease offer even though the tenant may believe they are signing nothing more than an expression of interest.

The use of such clauses could significantly impact the legal rights and obligations of the parties as well as bind the parties to a lease agreement on unfavorable terms.

When does an agreement become binding?

Parties make agreements during the leasing process. However, when such agreements become legally binding depends on the intention of the parties. The courts have classified the intention of parties in such circumstances into four categories.

1. The parties have reached finality as to terms and intend to be immediately bound, but the parties propose to have the terms restated in a more precise form, but no different in effect.
2. The parties have completely agreed on all terms and intend no departure from those terms, but have made performance of one or more terms subject to execution of a formal document.
3. The parties do not intend to make a final bargain, unless they sign a contract.
4. The parties are content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract containing additional terms.

In the first two cases, the parties will be immediately bound although with the second category, the parties will be bound subject to formal documents being signed. In the third category, the parties will not be bound and in the fourth category, the parties will be immediately bound by the first document whilst expecting to make a further contract in substitution for the first.

What is a deemed satisfaction clause?

A deemed satisfaction clause is a clause that deems an event or fact to have occurred, whether or not it has in fact occurred.

How are deemed satisfaction clauses being used?

In the context of offer to lease negotiations, deemed satisfaction clauses are being used to ‘fill in the gaps’ with any lease terms that have not been agreed. A deemed satisfaction clause may provide that if within five  business days of submission of the full Lease document to the Tenant, the Tenant does not dispute the terms of that Lease, they are deemed to accept all of the Lease terms. This could then bring the offer to lease within the first category identified above.

In what other circumstances can an offer to lease be binding?

Frequently, offers to lease use wording that purports to bind the parties immediately (for example, by providing a term that the parties agree to be immediately bound by the terms of the lease offer). This can lead to unintended consequences for both parties as it may mean that the contractual terms are unclear or unexpected or there is in actual fact, no agreement at all (if there are insufficient terms to make the agreement certain).

Too often we see little regard paid to the terms of the offer to lease with parties mistakenly believing they can negotiate the full lease terms at formal documentation phase. This is not always possible if the offer to lease already purports to be binding.

How do you protect your interests?

In order to protect your interests, you should always read the fine print and seek legal advice on offers to lease; Macpherson Kelley has extensive experience in property law. If you have any concerns, please contact us.

This article was written by Cathy Russo, Principal Lawyer – Property and Construction.