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.

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