Offer to Lease or Letter of Intent? Securing Commercial Space in Ontario Without Signing Too Early

A business looking for premises in Ontario will usually be handed one of two documents before it sees a lease. A landlord's leasing agent may send a proposal or letter of intent setting out the space, the term and the rent, marked non-binding and subject to lease. Or the agent may send an offer to lease, a form that looks similar but is drafted to become a binding agreement to lease the moment the landlord accepts it.

The distinction matters because a signed offer to lease, once accepted and once any conditions are waived, obliges the tenant to take the space and pay the rent for the whole term even though the formal lease has not been signed. Ontario courts treat an accepted offer to lease that settles the essential terms (the parties, the premises, the term, the rent and the commencement date) as an enforceable agreement to lease, and the landlord's standard form lease that follows is largely a matter of documentation, with little room left to renegotiate the deal terms. A tenant who signs an offer to lease thinking it is a letter of intent has committed to a five-year obligation on the strength of a two-page form.

The same principle that governs business purchases applies here: the court looks at what the parties agreed and how they intended it to operate, not at the title. In Wallace v. Allen the Court of Appeal for Ontario enforced a letter of intent whose terms and surrounding conduct showed an intention to be bound. A leasing document that settles every essential term and says nothing about being non-binding is in the same position. In Northridge Property Management Inc. v. Champion Products Corp. the Court of Appeal for Ontario upheld damages against a tenant that signed an offer to lease, moved in and left three weeks later, rejecting its argument that the offer was only an agreement to agree.

A genuinely non-binding letter of intent is useful when the tenant needs time before committing: to confirm zoning and permitted use, to price the fit-out, to secure financing or a franchise approval, or to compare two locations. It lets the tenant and landlord agree the commercial outline so that the landlord stops marketing the space while those checks are done, without the tenant being bound to lease.

For it to work, the letter must say in terms that it is not an offer or an agreement to lease, that neither party is bound to enter into a lease until a lease in a form satisfactory to both is signed, and that either party may withdraw at any time before then. A landlord will often ask for a binding exclusivity period in exchange, during which the landlord holds the space for the tenant, and a binding confidentiality clause. Both are reasonable if the period is short.

Tenants should resist a letter of intent that purports to be non-binding on the tenant but obliges the tenant to pay a deposit that is forfeited if the tenant does not proceed. That structure is a binding commitment dressed as a non-binding letter. If the landlord wants compensation for holding the space, negotiate a fixed holding fee for a fixed period instead.

An offer to lease is the right document when the tenant has done its checks and wants to lock the space before another tenant does. Its binding character is the point. The protection for the tenant comes from conditions: the offer should be conditional on the tenant's review of the landlord's form of lease, on confirmation of permitted use from the municipality, on any financing or franchisor approval, and on a satisfactory inspection of the premises, each for a stated period, each for the tenant's sole benefit, and each expressly waivable by the tenant alone.

The offer should also say what happens if the parties cannot agree the lease. The usual landlord position is that the tenant must sign the landlord's standard form with only the terms in the offer changed. The tenant's position should be that the lease will be on the landlord's form, amended to reflect the offer and such other reasonable changes as the tenant's lawyer requires, and that if no lease is agreed within a stated period the offer terminates and the deposit is returned. Without that clause a tenant can be bound to a lease it has never read.

Because an agreement to lease is a contract concerning an interest in land, section 4 of the Statute of Frauds requires it, or a note or memorandum of it, to be in writing and signed by the party to be charged before it can be enforced. An exchange of emails can meet that requirement, so a tenant should not assume that "we'll confirm by email" is safe. Treat every written exchange about the space as potentially binding until the form of document is settled.

Whether the document is a letter of intent or an offer to lease, the same terms decide what the space will cost and whether the tenant can leave. Settle them at this stage, because they are much harder to change once the landlord's form of lease arrives.

• Premises and area. The unit, the rentable area and how it was measured. Rent is usually charged per square foot of rentable area, which includes a share of common areas, so the measurement standard matters.
• Term, commencement and fixturing period. When the term starts, when rent starts, and how long the tenant has to fit out the space rent-free.
• Rent. Minimum rent per square foot per year, the escalations, and additional rent: the tenant's share of taxes, maintenance and insurance, often called TMI, with last year's actual figure and any cap on increases. Rent and additional rent attract HST, currently 13% in Ontario.
• Inducements. Free rent, a tenant improvement allowance and who does the base-building work.
• Use. The permitted use, drafted broadly enough that the business can evolve, and any exclusivity against competing tenants in the same property.
• Options. The right to renew, with the formula for renewal rent, and any right to expand or to terminate early.
• Assignment and change of control. Whether the tenant can assign or sublet, and whether a sale of the tenant's business, including a change of control of the corporation, requires landlord consent. Business buyers check this clause first; a tenant who ignores it may find its business harder to sell.
• Guarantees. Whether the landlord requires a personal guarantee from the tenant's principal, for how much and for how long. Our personal guarantee tracker helps keep these obligations visible.
• Deposit. The amount, whether it is applied to first and last months' rent, and when it is returned.

Our guide to commercial lease negotiation covers the lease itself, including the landlord's remedies under the Commercial Tenancies Act, which include distress against the tenant's goods and re-entry for unpaid rent.

Both documents are also the point at which the landlord assesses the tenant, and the tenant should be ready for the questions. A landlord leasing to a new corporation with no operating history will ask for financial statements or a business plan, a credit check on the corporation and its principals, references from a previous landlord, and almost always a personal guarantee from the principal. The guarantee is negotiable: a tenant can ask that it be limited to a fixed number of months' rent, that it fall away after a period of on-time payment, or that it be replaced by a larger deposit or a letter of credit.

The landlord will also want to know the intended use in detail, because the use clause in the lease will be drafted around it, and because the landlord may have granted an exclusive to another tenant that your business would breach. A restaurant, a medical clinic and a fitness studio each trigger questions about hours, ventilation, parking, noise and waste, and each may require municipal approvals that take longer than the fixturing period allows. A tenant that discloses the use fully at the offer stage avoids discovering a conflict after the offer binds.

Finally, the landlord will ask who the tenant is: the operating corporation, a holding company or the individual. Lease through the operating corporation, so that the lease obligation sits with the entity that earns the revenue, and resist signing as an individual. If the corporation does not yet exist, the offer should be made by the individual "in trust for a corporation to be incorporated" and section 21 of Ontario's Business Corporations Act releases the individual once the corporation adopts the lease. The offer can go further and say the individual is never personally bound, although few landlords will accept that without a personal guarantee.

Read the document for the words "offer", "agreement" and "binding", and for a clause that makes it conditional on a lease being signed. If the document can be accepted by the landlord's signature and contains the premises, the term, the rent and the dates, treat it as binding whatever it is called.

Ask the agent for the landlord's standard form of lease at the same time as the offer, and have a lawyer read both together. The offer sets the economics; the form of lease sets the obligations: repairs, insurance, relocation rights, demolition clauses, restoration at the end of the term. A lawyer's review at this stage is modest next to the commitment you are making, and it changes what you can negotiate. Our guide on when a contract needs a lawyer's review applies here with more force than usual.

Finally, keep the two documents distinct in your own correspondence. A tenant who signs a non-binding letter and then tells the landlord "we are proceeding, order the signage" has started to behave like a party to a lease. Conduct is evidence of intention, and Wallace v. Allen shows where that leads. If you have been sent either document, send it to us before you sign.