Real Estate Law Blog

It is common practice in lease negotiations for the parties to begin by informally negotiating the major lease terms. When the parties reach consensus on these major terms, they execute an offer to lease.  Such offer may be binding or non-binding.  A binding offer to lease is a contract itself and is enforceable.  Both parties should carefully consider whether they want the offer to be a binding agreement.  Ensuring that an offer is non-binding will generally require specific language in the offer and the avoidance of certain conduct by the parties after the offer is signed.

An offer to lease is considered to be binding if: (a) it contains the essential elements of a lease and (b) the parties have demonstrated an intention to be bound by the offer.

Essential elements of a lease

The essential elements that must be set out within an offer to lease or a lease, and upon which there must be agreement between the parties for the agreement to be binding, are as follows:

1. a description of the premises;
2. the identities of the parties;
3. the amount of rent to be paid;
4. the commencement date of the lease;
5. the term of the lease; and
6. other material elements (including applicable covenants, conditions, exceptions or reservations).

Intention to be bound

The intention of the parties to enter into a binding agreement may be made clear by the words of the offer, the actions of the parties during negotiations and the actions of the parties after the offer to lease is signed. If a judge has to determine whether there was an intention to be bound, she makes this determination from an “objective” perspective, meaning that the intentions of the parties are determined from the perspective of a reasonable person without consideration of what the landlord and tenant may later claim they intended.

When the offer to lease does not indicate that it is binding or non-binding, the actions of the parties help the court determine the objective intentions of the parties. For example, if a tenant spends significant time and effort preparing and moving into the premises, the court will generally interpret this as an intention for the lease to be binding.

If an offer to lease explicitly states that it is either binding or non-binding such statement is usually conclusive of the intention of the parties.  However, it is possible that despite an offer to lease including a provision that it is non-binding, a court could conclude that the actions of the parties objectively indicate that they intended to be bound by the offer. Therefore, it is important for landlords and tenants to ensure their actions are consistent with a non-binding agreement.

What if the offer to lease is non-binding but the tenant has moved in?

If the offer to lease is binding, or is found to be binding by court, then its terms will govern the tenancy for the term set out in the offer.

However, if the offer is non-binding, at common law, a person who takes possession of a leased premises and pays rent under an unenforceable agreement may be considered to be a periodic tenant from month to month or year to year depending on the circumstances.^[1]  This creates a lot of uncertainty for both parties, but can be avoided with carefully drafted terms in the offer to lease and by ensuring the lease is executed prior to the landlord giving or the tenant accepting possession of the premises.

Tips for parties when entering into a lease:

• Ensure the offer to lease clearly states the parties’ intention that the offer be binding or non-binding.
• To ensure a non-binding offer to lease remains non-binding, consider leaving an essential term out of the offer to lease - For example, set the rent within a certain range instead of a set number.
• Include a provision in a non-binding offer to lease that says the parties will negotiate and execute a formal lease prior to the granting of possession of the premises.
• Execute the lease before the tenant moves into the premise.

[1] Shunjing Trading Inc v EB Engineered Panels and Controls Inc, 2011 NBCA 29 at para 14.