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Some surprise revelations about the Offer to Lease

If you’re looking for success, you need to do more than just network. You need to know how consumers are changing the industry, how to solve their problems better than the competition and how to avoid legal pitfalls. This sounds like a lot of work, because it is.

You can get a head start, however, by getting valuable free advice from the industry experts who speak at reputable real estate events, such as the recent SpringFest event staged by Informa Exhibitions in Toronto.

If you attended SpringFest 2016 and listened for one hour you would have received a lot of advice from two of the province’s most knowledgeable and innovative brokers, Claude Boiron of Royal LePage Terrequity Realty and Shafin Jadavji of Cubecom Commercial Realty, as well as leading legal experts Charlene Schafer of McCarthy Tetrault and Christina Kobi of McLean & Kerr.

The experts covered a wide range of fascinating insights, ranging from industry trends to unexpected legal issues. The biggest nugget of gold: the fact that consumers want lawyers and brokers to work differently… or they won’t be getting any work at all!

Boiron and Jadavji asserted that the new way of providing real estate brokerage services is to offer a full service approach. Full service no longer means what you think. Having an office, marketing pamphlets and a few contacts won’t cut it. Technology can do that faster and cheaper. Full service means that the agent or broker loses the “salesperson” identity and replaces it with “dream maker”.

Agents become “dream makers”, a term coined by Jadavji, if they’re able to weave together all the different players such as lawyers, property managers, developers, investors and designers. Shafin, a true industry leader, also makes sure that each party delivers on all promises on time and on budget.

The panellists said that the agent’s value is no longer derived from just finding the property and negotiating; rather, her value comes from the fact that she can eliminate time wasted between negotiations, protect her client’s legal interests and ensure that her client ends up with a solid deal. In other words, to stay relevant, agents must offer a “consulting” role whereby they assemble, manage and, yes, even pay for some legal, financial and design expertise.

The biggest mistake agents, tenants and landlords are making is not getting proper advice during the negotiating process, they said. Agents fear that bringing in a lawyer during the negotiations will stall and delay the process… which is true if you don’t find the right lawyer!

The change all panellists are seeing is that clients no longer want lawyers to work in isolation. This is because excluding the lawyer actually delays the process. The lawyer’s unfamiliarity with the deal, parties and parties’ interests, as well as legal issues overlooked by the agents, will always lead to misunderstandings and the need to reopen the negotiation process.

If a “dead deal” doesn’t convince you that lawyers should be consulted before the papers are signed, then here’s just one of the many common mistakes made by those who don’t get the advice they need.

What you didn’t know about the Offer to Lease 

Given today’s hot market, tenants and their agents are quick to hold up a deal by signing an Offer to Lease (OTL). They do this without understanding or reading the terms of the OTL as it simply formalizes the “first step” in the negotiation process. After all, OTLs aren’t binding, right? Wrong!

Much to the audience’s surprise, Schafer and Kobi said that signing an OTL can have the same legal effect as signing the final lease itself.

An OTL can be binding, according to the Ontario courts, if it includes the following:

  • The name of the parties;
  • A description of the premises;
  • The commencement;
  • The duration of the term;
  • The rent; and
  • All the important (referred to by lawyers as material) terms of the contract.

The audience was shocked. We proceeded to delve into what “material terms” actually means. According to our lawyers, material terms cannot simply be incidental to the relationship of landlord and tenant. The parties have to address “deal breaker” concerns that are unique to the tenant or landlord and put them straight into the OTL.  It’s a point worth repeating: if material terms are included in the OTL, the OTL can be binding.

It gets worse. You can also be bound to the terms of a lease that you never read! This happens if the OTL contains a clause requiring the tenant to accept the landlord’s standard form of lease, subject to only minor changes to make it consistent with the terms of the OTL. If the above legal requirements are met, the courts will enforce the OTL and the lease terms… even if the outcome is unjust!

How to avoid this unfair outcome?

One of the many tips offered by our panellists is to ensure the OTL clearly states that the OTL is not intended to be binding. The OTL should also unambiguously set out the responsibilities and rights of the parties as it relates to preparing and accepting the final lease. Of course, all parties agreed that every OTL should include a condition stating that the OTL will not be binding until it’s approved by a lawyer.

As Jadavji put it, the secret to real estate success for agents, investors and lawyers is to make sure that your dream maker and dream protector work together from the very beginning. After all, without the dream makers, a client’s dream won’t come to fruition. Without the dream protectors, it can turn into a nightmare.