What is a Contract to Lease?
A contract to lease is an agreement between a landlord and a tenant where the landlord grants to the tenant authority to take possession of a specified premises at a specified time in the future and for a specified period of time. A contract to lease is different from a lease because it is an agreement to enter into a lease. It is often necessary when renting premises for a specific period of time in the future. The parties may well have entered into a commercial lease already, but for the future commencement date, the landlord and tenant may decide that they do not want to agree to a full lease agreement at the current time. For example, the parties may not want to enter into a full lease agreement because they are not ready to enter into a lengthy lease , or the landlord may want to avoid the necessity for a full lease agreement because the Owner does not own the premises at the time and is not prepared to enter into a full lease agreement until the parties can resolve the issues with the full lease agreement.
A lease agreement typically has an insurance provision for the duration of the term of the lease. It also has other provisions such as repair and maintenance during the term. A contract to lease does not usually contain these terms because the parties are not really in a lease position, they are in an "at will" period because the premises may not be ready for occupancy for a number of months.
A contract to lease is very important for title insurance purposes. If the premises is owned by the landlord, consequently the landlord will want to be the named insured on the title policy. If the landlord and tenant enter into a contract to lease then the tenant will not have ownership interests at the time and hence the tenant will not be named on the title policy.
Components of a Contract to Lease
The contract to lease should include the names and address of the tenant and the landlord (not the real estate agents), a description of the property, the rent (exclusive of utilities), the length of the proposed lease (whoever did the drafting may have added this illegally if it had not been properly sounded out at the negotiation stage) and the terms and conditions of the proposed lease (with which the tenant and landlord should be familiar) including whether or not the proposed lease is to be insured. It has become common in many regions of Canada to include a term in the lease agreement whereby the landlord warrants that certain appliances are in good working order. Those appliances would include the water heater, heating plant, water softener, washer, dryer and other appliances in the unit. The inspection for defects in the appliances can be conducted by the tenant a few days prior to the commencement of the lease. This should be done with the landlord or its agent present.
Legal Aspects and Safeguards
Signing a contract to lease brings into effect the same protections and penalties as a normal legally binding contract. Not all tenants are landlords are familiar with this fact, and may therefore enter into a verbal agreement, one that may not be legally enforceable.
One of the main implications of signing a contract to lease commercial property is that it protects the tenant from any potential financial and legal difficulties caused by the landlord subletting or assigning land to a third party, or selling it to a third party as part of an investment package. While these extra parties performing legal and financial actions in relation to the property could leave a tenant with responsibility for rent if the landlord defaults, a commercial lease contract signed by the landlord and tenant stops such a third party being able to take action against the tenant.
A contract to lease is also legally binding in terms of terminating the lease agreement between tenant and landlord – if the landlord does not term the agreement in accordance with the contract’s terms and conditions, the offer of occupation remains valid for the tenant. As a result, the tenant can potentially enter into litigation with the landlord to resolve the matter, thereby enabling the tenant to occupy the premises and make use of them.
A contract to lease can also protect the tenant financially, including in terms of significant expenditure on a commercial property by the tenant. Where a tenant is willing to invest significant amounts of money into a building or structure for renovation before usage, the landlord may try to secure a loss of some of that investment by selling the property to a third party. However, a contract to lease protects the tenant’s interests as it stops the landlord from trying to recoup losses by asset disposal.
The law protects both landlord and tenant in a contract to lease agreement, creating a range of securities for both. Both parties are entitled to remaining within the agreement unless otherwise stated. Any disputes can be brought to the attention of the courts, from which terms protection will exist.
Advantages for Tenants and Landlords
A contract to lease offers flexibility for both landlords and tenants. The tenant is not committed to the lease for a long period of time since it is only committing to the property for the term of the contract to lease. Similarly, the lease is not binding on the landlord until the lease is registered or until the landlord has signed a written notice waiving registration which stipulates that the contract to lease is binding. Having a contract to lease is a benefit to the tenant because it affords the landlord the opportunity to evaluate the tenant’s ability to pay rent for the term of the lease.
For landlords, entering into a contract to lease means that they can retain control of the property until the lease is entered into or registration is waived thereby avoiding any lost rental or delay in leasing out the property.
A contract to lease also offers the parties a degree of security with respect to their negotiations. Under a contract to lease, if the parties still need to negotiate a term of the lease (e.g. a longer or shorter term than originally contemplated), the contract to lease gives them some breathing room while continuing to bind them. For landlords, a contract to lease provides security knowing that the tenant is committed to the property should the deal fail to close but the landlord’s other deals do not.
Myths About a Contract to Lease
As a preliminary matter, many people think that a contract to lease is binding on both parties. While the terms of the contract will likely be fully accepted and incorporated in the lease agreement, a contract to lease is just that: an agreement to lease if the lease is negotiated and executed. Though rare, a party may not desire to proceed with the transaction, or a transaction may fail due diligence or be rejected by a lender or third party. As in any agreement, it is important to consider applicable termination rights under the case law and those given express written effect pursuant to the terms of the agreement and the parties’ negotiations.
In the same vein, many landlords and tenants think that a contract to lease between a landlord and tenant near agreed upon terms evidences a signed lease. This is not the case. A party is obligated to accept the terms of a contract to lease prior to it being binding on both parties. It is also important to ensure that all lease amendments or modifications are in writing and signed by the parties. A signed email from one party may not evidence a modification to the terms of the lease between the parties . For example, is a tenant permitted to bring in its own contractor to perform renovations or restitution to the premises? A landlord may have thought so based on the tenant’s communication, when in fact the tenant may not have had the right under the terms of the lease to make the improvement. As such, the landlord may find itself in the unfortunate position of having a building code violation, liens or an obligation to indemnify a third-party laborer (or the contractor) injured on the premises.
Many landlords and tenants believe that a contract to lease is an oral agreement to lease. This is also not the case. In addition to the aforementioned issues, many jurisdictions have statutes of frauds requiring that the agreement be in writing to satisfy the statute.
Lastly, some landlords and tenants believe that a contract to lease binds or prevents someone who is not a party to the lease from relying on its terms. This is not true. Common law doctrines related to third-party beneficiary rights may extend to someone not a party to the contract. In addition, a number of laws, such as the Americans with Disabilities Act, Fair Labor Standards Act, Fair Housing Act and state and local laws and ordinances, may extend to non-parties.
Creating a Contract to Lease in 6 Simple Steps
Before one enters into a contract to lease, they should consider the following steps in order to create a contract to lease:
1. Identify the Parties
When creating a contract to lease, first identify the parties that will be included in the agreement. In a residential lease, this will typically be the landlord and tenant. For commercial leases, one will typically list the landlord and tenant and any entities that will be responsible for carrying out the terms of the contract. It is important to identify the parties to the contract, because they are the face of the contractual agreement.
2. List the Premises
In the contract to lease, a party will need to include the address and description of the property to be leased. Once again, it is important to clearly define the premises, because this defines what is to be included in the agreement.
3. Clearly Define Terms
In creating a contract to lease, it is important to be clear in defining the terms. A well-drafted lease will clearly define what parties are included, if a property will be jointly or separately owned, what payments are required, what happens if the terms of a contract are violated, and any other specific terms that must be considered.
4. Gather All Documents and Information Relating to the Agreement
The next step in creating a contract to lease is to gather all documents and information relating to the contract. This includes any deeds, title agreements or records, previous leases, zoning ordinances, home owner association agreements, surveys, plans, designs, and photographs of the property.
5. Consult with an Attorney
Lastly, a party may wish to consult with an attorney to discuss the contract and any legal requirements. There are many areas of the law that relate to contracts and real estate, and an attorney can help a party to understand their rights and obligations under the contract. A contract to lease represents a serious legal obligation and can have long term implications. Therefore, it is important to ensure that the contract meets all of the legal requirements and that all parties understand their responsibilities under the agreement.
When to Consider a Contract to Lease
A Contract to Lease is most appropriate in connection with the leasing of large spaces and projects, where there will be substantial amounts of capital invested in the construction of improvements. The use of a Contract to Lease is also more common when space is being developed specifically for a Tenant in connection with a large scale redevelopment or the construction of a new building. In these situations , a Contract to Lease will provide certainty for both the Landlord and the Tenant, and allow them to enter into a binding agreement with respect to the terms of their deal, and provide for a process by which the completion of the transaction can be structured and the Contract can be converted into a fully executed lease.