This is probably the most important part of the process as it will likely lead to legal obligations to lease a property and so, careful attention must be paid to balancing opportunities with obligations. For example, making an unconditional offer will likely lead to you achieving a better deal, but once the landlord signs it you are legally bound to complete that transaction and that does carry consequences.
Sometimes, larger, more sophisticated landlords will want to start formal negotiations with what is called a Letter of Intent (LOI). This is nothing more than a letter stating very broadly your expectations around lease term, rate and use and any other major concerns. They are intended solely to save everyone the bother of negotiating an offer to lease until the parties are reasonably certain there is a good possibility of a successful transaction. They are a bit tricky because they are normally intended to be non-binding, but courts have, in some situations, found them to be binding. This is beyond our expertise as agents, but generally the more information in the LOI, the greater the possibility it will be deemed binding, even with a clause stating it is non-binding. It is always best to seek legal advice when proceeding.
For this reason, Gerald prefers going directly to an Offer to Lease (OTL) and not bothering with an LOI. An OTL is a formal document, it only takes a little more time to properly prepare an OTL and everyone is aware that they are intended to be binding if agreed upon, so the legal uncertainty is reduced. Gerald uses forms provided by the Alberta Real Estate Association as they are prepared by experienced real estate lawyers and are among the most fair real estate documents you will find. Landlord prepared documents generally favour the landlord in most or all respects.
As the old saying goes, luck is what happens when preparedness meets opportunity. When an offer to lease is imminent, best to start preparing for the negotiation. Here are a few thoughts;
- Determine market position of the Landlord
- Determine the market position of the property
- Listings to Leases ratio
- Inventory increasing/decreasing (market absorption)?
- Immediate competitors
- Determine apparent market rent
- Is there a Plan B? A BATNA? (See link below on negotiation)
- Determine relative bargaining position/strength of landlord
- Perform a market rent analysis for the property and set target rate
- Set 2 incrementally increasing/decreasing midpoint reductions in relation to target rate
- Determine personality/negotiation style of the other party
Here are a few links on negotiation and persuasion. They are all based on recent negotiation science; the first three on the Harvard Negotiation project (see the book Getting To Yes by Fisher and Ury) and the last one on negotiation principles determined by Robert Cialdini. There are many more negotiation styles and videos, these are some of the most highly regarded.
William Ury - Getting To Yes
4 Harvard Principles of Negotiation
Negotiation Principles - Getting To Yes
Six Negotiation Principles
A good agent will help determine the best answer for you to all the following questions;
How much should I offer is the number one question on everyone’s mind, and the answer is, you guessed it, it depends. It depends on a lot of things.
Will a low offer upset the landlord? I’ve seen arguments for and against this question and both are right – you might or you might not. You can never know for sure so all we can do is make an educated guess and balance the benefit gained by a low price offer against the cost of insulting a landlord who then digs in her heels on rental rates.
I believe the most important question to ask yourself in any dilemma is, is the risk worth the potential benefit? This question should be asked in all situations when you are deciding on a course of action in an offer.
If the low offer backfires, how much of an impact will that have on your plans? Is this the only suitable property you have found in a long time? Is the property only somewhat suitable and of little consequence if you lose it, etc.?
Should I make a good offer? Again, same question, is the risk worth the potential benefit? How well is the property priced? Have your agent perform a comparative market rent analysis on the property to help you decide.
What conditions should I include in my offer? Conditions are clauses you add in the offer that basically say, “I will lease this property IF (and only if) it meets all these conditions. If not, my deposit is refunded and we walk away from each other no harm, no foul.”
This could be a very long discussion but let us give a brief summary of the most common (and recommended) lease conditions.
- Subject to due diligence (various inspections)
- Subject to review and approval of landlord’s standard lease
- Subject to obtaining suitable finance
- Subject to successfully achieving all required municipal approvals (zoning/ fire, etc.)
- Subject to satisfactory environmental report
There are numerous other potential conditions that generally occur only in specific circumstances. If you are a large corporation, you may need Board or Management approval as well.
Many larger, sophisticated landlords may have a disclosure package ready with numerous reports, but there is no legal requirement for them to do so. Who pays for items such as inspections, environmental reports, etc., is a matter of negotiation. Be prepared for the possibility of paying for more than one report. You basically need to confirm the property is suitable for your requirements including power, water, etc.
This is more of a concern with older industrial buildings where floor loads, water supply, electrical supply, etc., may not be sufficient for your requirements.
The amount of time required to go about satisfying your conditions varies from location to location, market to market, and transaction to transaction, but most fall between 30 – 90 days. This, like everything, must be negotiated.
You will also want to review the landlord’s standard lease. In most situations, the offer to lease is not the final document. Most landlords have their standard lease which will supersede the offer to lease and will be the binding document governing your time in the property. This document will surely favor the landlord and it is critical that you satisfy yourself with its contents before signing. Once you sign it, you are bound by it.
Be sure to have your lawyer and your agent review it (lawyer especially) for potential trouble spots and try to negotiate those clauses. Just because it is the landlord’s “standard” lease doesn’t mean anything, try to negotiate unfair or troublesome clauses. Take the time to discuss any and every clause that concerns you with your agent and lawyer. It varies depending upon market conditions and various landlords, but you can and should try to negotiate more reasonable clauses when you find ones that are of concern.
Once you have satisfied yourself that the property is suitable for your requirements, you will be granted your business permit, you are satisfied with the landlord’s lease document, and you can get financing, it is time to notify the landlord that you remove your conditions. When you do this, you are legally bound to lease the property.
Congratulations, and best of luck in your new business!