When looking for premises to lease for your business, you and the landlord may sign a preliminary document called a letter of offer. It is also referred to as a heads of agreement and covers the key commercial terms of the lease. It allows parties to agree on these terms and other special conditions before executing a formal lease. This article explains what a letter of offer is and whether it is binding on you.

Accepting a Letter of Offer

It is common practice for a tenant to receive a letter of offer before formally entering into a lease. Generally, the landlord or the landlord’s agent prepares the document. It sets out the offer the tenant has made, which the landlord wants to accept.

Preparing a letter of offer is an excellent first step. It allows the parties to agree on the key commercial terms, which may be non-negotiable, before drafting formal lease documents. Both parties sign the letter of offer. Then, the landlord’s lawyer prepares a formal lease for the parties to review and execute.

Binding Letter of Offer

If you have signed a letter of offer, it is essential you understand your contractual rights and obligations. Generally speaking, a letter of offer is an informal document. This means the lease is not binding until you and the landlord have signed the formal lease documents. However, each letter of offer is different. For example, your letter of offer may include a term which provides that the informal agreement is binding.

In turn, this signifies that the parties intend to be bound by the document. Therefore, you may not be able to back out of a lease without breaching its terms, even if you have not signed the formal documents.

Your actions can also indicate your intention. The New South Wales case Streat v Fantastic Holdings Limited grappled with this issue. Here, the tenant had signed the letter of offer and the lease. Likewise, the landlord had signed the letter of offer but not the lease. The landlord then tried to argue that the lease was not binding because he had not signed the lease. Ultimately, the court ordered the landlord to sign the lease and fulfil his obligations under the lease. This was because the tenant was already occupying the premises and paying rent. The fact the landlord allowed the tenant to occupy the premises signaled his intention to be bound by the lease terms.

It may be tempting to lock down the lease, especially if the premises seem perfect for your business. You should avoid this until you have seen the full lease agreement. This gives you the flexibility to walk away from the lease for whatever reason.

Five Practical Tips

  1. Ensure the letter of offer includes a term stating the agreement is not binding until the parties review and sign the formal lease documents.
  2. When the other party has sent you the lease for review, confirm the agreement will not bind you until you have agreed on final terms.
  3. Any pre-contractual communication should make it clear the agreement is non-binding. Be careful when communicating with the agent or landlord’s lawyer.
  4. Make sure you are happy with the terms of the letter of offer. A commercial leasing lawyer can assist you with the terms you should include in your agreement.
  5. If you have signed a non-binding letter of offer, you should ensure you are in a position to recover any deposit you have put down. Most of the time, a letter of offer will state that, if you do not proceed with the lease, you need to forfeit your full deposit or reimburse the landlord for any costs they incurred in the preparation of the lease. You should try to limit your liability, in the event you decide not to proceed with the lease.  

Key Takeaways

A letter of offer summarises the commercial terms that the parties’ lawyers will include in a lease. Parties should ensure they are on the same page before drafting the formal lease documents. However, you should be careful before signing a letter of offer. There may be specific terms in the agreement which make it binding. Alternatively, your actions may signal your intention to be bound by the lease. You should aim for a non-binding document which gives you the flexibility to walk away from the lease.

If you need assistance with your lease, contact LegalVision’s commercial leasing lawyers on 1300 544 755 or fill out the form on this page.

COVID-19 Business Survey
LegalVision is conducting a survey on the impact of COVID-19 for businesses across Australia. The survey takes 2 minutes to complete and all responses are anonymous. We would appreciate your input. Take the survey now.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited lawyer consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Lauren McKee
Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy