Having the right location is key to the success of most (if not all) retailers. A lot of thought and effort is often put into the search to find the right location, but once it is found, a tenant may want to do whatever it takes to have a binding deal to lease the premises as quickly as possible. Often, the simplest and most time and cost effective way to do this is to negotiate and sign a binding letter of intent (LOI) or offer to lease outlining the key business terms.

Although a binding LOI or offer to lease can be an expedient way to reach an agreement on the major business terms of a lease, the incorporation of these provisions into a lease and the negotiation of the remaining "standard" terms of the lease can be a source of dispute. In the course of negotiating a lease, either party may insist that a new term be inserted which was not contemplated in the offer. Often, such issues are resolved by negotiation in order to start the relationship on the right footing (or to preserve an existing relationship). However, when the parties are not able to do this, the issue of whether one party has repudiated (i.e. walked away from) the binding LOI or offer to lease can arise.

Consider the following scenario. A landlord and tenant enter into an offer to lease. The offer sets out the major business terms and requires that the parties enter into a lease on the landlord’s standard form, subject to reasonable amendments by the tenant. The offer does not specifically contain a right of termination in favour of the landlord if it wishes to demolish the building (a "demolition clause"), but the landlord’s standard form of lease contains a demolition clause. In this case, can the landlord insist that the tenant sign a lease containing the demolition clause? In Goh v. M.H. Ingle & Associations Insurance Broker Ltd. [1987] O.J. No. 1341 (H.C.J.), the court held that such a term was a "significant and material departure" from the offer, and the tenant was entitled to repudiate the agreement.

The Ontario Court of Appeal recently considered the issue of repudiation of an offer in 365 Bay New Holdings Limited v. McQuillan Life Insurance Agencies Limited 2008 ONCA 100 rev’g [2007] O.J. No. 521 (Sup. Ct. J.). In this case, the landlord and tenant entered into an offer to lease (the "Offer"). Amongst other things, the Offer provided that subject to minor non-financial amendments, the tenant would execute the landlord’s standard lease which was to incorporate the terms of the Offer. Upon receipt of the draft lease, the tenant proposed several amendments, and a back-and-forth negotiation ensued. Several months (and drafts) later, the landlord sent execution copies to the tenant incorporating the final amendments it was prepared to accept. The tenant refused to sign the lease and proceeded to enter into a lease for different premises. The landlord claimed that the tenant was in default of the agreement and terminated the lease and claimed damages.

The Court of Appeal accepted the findings of the trial judge that execution version of the lease sent to the tenant differed significantly from the Offer. These differences included:

  • the building’s operating hours;
  • the requirement of a security deposit; and
  • the inclusion of a management or administration fee.

The trial judge found that in spite of these differences, the parties had actually come "to agreement about the form and content" of the final lease. Based on this finding, the trial judge concluded that the tenant repudiated the Offer and the lease and was liable for breach of contract. The Court of Appeal disagreed and allowed the appeal on the basis that the evidence did not disclose that the parties had come to an agreement on the final form of the lease. Without agreement between the parties on the content of the lease, the landlord could not insist that the tenant sign the final version it sent to the tenant since it differed significantly from the Offer.

It follows that a court will not likely hold a tenant liable for failing to execute a lease that differs from the offer in terms of a management fee, a security deposit and operating hours of the building.

A similar decision was rendered by the British Columbia Court of Appeal early last year. In A.L. Sott Financial (FIR) Inc. v. PDF Training Inc. 2008 BCCA 35, the Court of Appeal affirmed the trial judge’s decision that since the offer did not contain a management fee, the landlord could not require one in the lease. Interestingly, in this case, the offer to lease was a standard form used by the landlord which contained the text "management fee of ___%". The landlord was unsuccessful in its argument that a management fee was contemplated because of the existence of the text, as no value was set out in the offer to lease. The landlord’s failure to deliver a draft lease that did not require payment of a management fee was a fundamental breach of the offer and constituted repudiation of the offer.

Two practical suggestions arise from these cases. Firstly, each party should ensure that the offer contains all provisions which are most important to it (particularly if the issue is a ‘deal breaker’). If such provisions are not addressed in the offer, they may very well not be included in the lease. Secondly, if there is ongoing disagreement in the negotiations (where an offer has been signed), a tenant should be explicit in asserting that no agreement over substantive content exists. In McQuillan, the Court of Appeal overturned the judge’s finding of fact on this issue—not his reasoning that flowed from the erroneous finding.

These problems could be eliminated if the parties were to skip negotiations of an offer and go straight to negotiating a lease. However, the need to have binding deals completed in a timely manner combined with the desire not to spend money negotiating a lease before the major business terms have been agreed upon, may make this impractical. One way that both parties can protect themselves is to carefully review the ‘lease clause’ in the offer. This is the clause that sets out what form the lease will be based upon and what types of amendments will be made and how the parties will conduct themselves in the lease negotiations. The clearer and more detailed this clause is, the less room there is for disagreements or disputes to arise during the lease negotiations and clarity and completeness will help prevent repudiation issues from arising.