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How Does an Office Lease Offer Letter Work?

An office lease offer letter has been called a meeting of the minds, an agreement to agree, even an "engagement" in the courtship process between tenant and landlord. Also referred to as a letter of intent, the properly drafted office lease offer letter is a non-binding document that outlines key terms of a proposed deal prior to the execution of a commercial office lease.

Once mutual interest in leasing a space has been established, the office lease offer letter provides an intermediate step between conditional interest and signing a formal lease document. It demonstrates a commitment to making a deal, but should not bind the parties to the deal until further negotiations are completed for the commercial lease. In a simple lease deal, the office lease offer letter may not be necessary--the parties can skip the middle step and get right to lease negotiations.

The office lease offer letter is drafted by the landlord, the tenant, or their lawyers, and contains a summary of key issues. Usually included are the names of the landlord and tenant, a description of the premises, the length of rental term, the amount of rent and inclusions, permitted use, and deposit. The more complicated lease offer letter may have such details as who is responsible for renovations, maintenance and repair, and other charges. The content will vary depending on type of premises, as well as those things considered important by individual landlords or tenants.

Benefits

There are many positive gains afforded by an office lease offer letter. Entering into lease negotiations is costly and very time consuming. A letter of intent or lease offer letter reflects a mutual agreement that a deal is possible, and each party will feel more comfortable committing both time and money to make it happen. For example, the tenant will be confident paying a lawyer to review a lease when a letter of intent has been signed, because the deal is less likely to fall apart.

A well-drafted lease offer letter can reduce back-end lease preparation and negotiation costs, because terms set forth in the lease offer letter can serve as a blueprint for the actual lease. In addition, as principal terms are set forth and agreed upon via the lease offer letter, parties will feel an obligation to stick with them, and be less likely to renegotiate during the lease negotiations process. They can focus on the final details and legal language necessary to flesh out the deal.

When board approval is required for a tenant to lease office space, the lease offer letter is an ideal document for this purpose. Tenants can bring a proposal to the board much more quickly and for much less expense than if they waited for a completed lease draft, thereby avoiding the risk of investing a great deal in a property the board decides to reject. In like manner, the lease offer letter can be presented for investor and lender considerations prior to their involvement in the transaction.

Cautions

There are inherent risks in a lease offer letter, mostly due to the complicated nature of contract law and the fine points of non-binding and binding language. Parties have been unpleasantly surprised when a lease offer they considered to be an agreement to agree was later determined in court to be legally binding. While a letter of intent or lease offer letter is primarily intended to be non-binding, a long history of court cases illustrate that courts will find them binding if certain items are present.

A non-binding lease offer letter is usually in the best interest of both parties, as neither desires to be held to an agreement before all points are thoroughly negotiated and set forth in a formal lease agreement. It is not enough to state at the outset that the lease offer letter is non-binding. On the contrary, the language in a lease offer letter must be very precise, and contain the follow specific points:

1) There is no intent by either party to be bound by the terms of the lease offer letter.

2) There is no binding agreement until the lease itself is signed.

3) The lease offer letter does not address all of the essential terms of the lease.

4) Any agreement between parties is contingent upon future approval.

5) The offer can be withdrawn at any time.

Even when this language is present in the lease offer letter, such documents have been found binding when the conduct of the parties after signing is taken into account. Companies that publicly refer to the lease offer letter as a deal may find that this simple act can make it binding in the eyes of the court. For example, after signing a non-binding lease offer letter, one organization declared they had a "deal" and told signers to keep their pens as a memento of the occasion. The lease offer letter was found to be binding as a result of this behavior in an ensuing court case. Another organization held a press conference to announce a "deal" after signing a non-binding lease offer letter, which conduct also caused courts to declare it binding.

Parties must be careful with both lease offer letter language and post-signing conduct in order to maintain the non-binding status of the document.

Now that the complexities of contract law have made us all swear off any legal documents for the foreseeable future, there is one more contradictory detail to absorb. A lease offer letter should have some binding elements. For example, both parties will want a confidentiality clause that is binding, so that tenant's financial information cannot be disclosed to other parties, nor can the lease business terms be disclosed. If the tenant is to have access to the property before the lease is signed, the lease offer letter may include an indemnification clause to protect the landlord. Agreements to pay for pre-agreement costs and performance deadlines may also fall under binding elements of the lease offer letter.

Responding to the lease offer letter

If the lease offer letter is drafted by the landlord, the tenant will want to review it carefully and respond in all cases, indicating agreement or disagreement with terms. The tenant should look for evidence of binding language, such as "as we have agreed . . ," or "unless I hear from you to the contrary," and seek help from a lawyer or competent broker to be sure that the final lease offer letter does not have binding language.

Tenants should be sure to address any terms they dislike immediately; waiting until official lease negotiations to address them may result in an indignant landlord, who assumed that tenant silence indicated agreement with the terms, and may be unwilling to negotiate what she or he considered already set. If timing is unacceptable to the tenant, or he or she feels rushed, now is the time to indicate this and make the lease offer letter a document all parties are comfortable signing.

Conclusion

The complex world of commercial leasing involves hundreds of hours, with deals put together via face-to-face meetings, phone calls, emails, and letters; and involving a host of different professionals, including corporate officers, lawyers, bankers, accountants, architects, and engineers. The lease offer letter provides an intermediate step between mutual interest and involving all of these parties in drafting a commercial lease. It provides a venue to nail down some of the critical details of the pending lease, and gives assurance to parties that both are committed to seeing the deal through. With careful drafting, the lease offer letter can save time and possibly money, without binding the parties to a document intended to be a preliminary agreement to agree.

Sources:

http://www.buckley-law.com/article/minimize-your-risk-when-using-letters-of-intent-in-commercial-lease-transactions/
http://www.nolo.com/legal-encyclopedia/clb-letter-intent.html
http://www.millernash.com/using-letters-of-intent-in-commercial-real-estate-transactions--tool-or-miscue-01-01-2005/
http://www.nolo.com/legal-encyclopedia/clb-responding-letter-intent.html
http://www.sbjlaw.com/sites/default/files/Letters%20of%20Intent%20NYLJ%20-%20JJM%207.12%20REPRINT.pdf

http://www.sfbar.org/cle/tests/2013/self-study-exams-mar2013.aspx

Dana Hamson

Dana Hamson

Guest Writer for 42Floors