Letter Of Offer Lease Review: What To Check First

You've found a great premises, the landlord or agent has sent through a letter of offer or heads of agreement, and everyone is keen to move quickly.

That early document can feel less formal than a lease, but the terms you agree now can shape the whole deal. Rent, incentives, fitout access, options and make good obligations are much easier to negotiate before the lease is drafted.

A letter of offer lease review helps you slow things down just enough to check the commercial risk, without losing momentum. The goal isn't to make the process complicated. It's to make sure you're not accidentally agreeing to terms that are expensive or hard to unwind later.

Is A Letter Of Offer For A Commercial Lease Binding?

It depends on the wording, the surrounding emails and what both sides intended when the document was signed.

Many lease offers and heads of agreement say they're "subject to lease" or "non-binding", which usually means the parties don't intend to be locked into the full lease yet. However, some parts may still be binding, such as confidentiality, exclusivity, payment of legal costs or a deposit clause.

The risk is that a short document can still create real obligations if it contains the key commercial terms and shows an intention to be bound. Those key terms often include:

• The premises and permitted use
• The lease term and any option periods
• The starting rent and rent review method
• Outgoings and other payments
• Security, such as a bank guarantee or director's guarantee
• Special conditions, such as landlord works or fitout access

Even if the whole offer isn't binding, it can become the commercial baseline for the lease. If you later ask to change something important, the landlord may say, "That was already agreed."

Before signing, look for phrases like "binding", "subject to contract", "subject to formal lease" and "the tenant must pay". If the document is unclear, it's worth getting tailored advice before you send it back signed.

What Should You Check In A Letter Of Offer Lease Review?

You should check the terms that affect your cash flow, flexibility and exit risk before you agree to the offer.

A lease offer review is different from a full lease review. At this stage, you're usually checking whether the deal is commercially workable and whether any missing points should be negotiated before the long-form lease is prepared.

First, Check The Money Terms

Start with the costs you're committing to, not just the headline rent. A low starting rent can still become expensive if outgoings, rent increases and security are heavy.

• Base rent: Is it plus GST? When does it start?
• Outgoings: Are they included, capped or payable on top?
• Rent reviews: Are increases fixed, CPI-based, market-based or the greater of several options?
• Incentives: Is rent-free time, a fitout contribution or a cash incentive clearly documented?
• Security: Is the bank guarantee or bond calculated on rent only, or rent plus outgoings and GST?
• Landlord legal costs: Are you expected to pay them? Some retail leasing laws restrict what landlords can recover.

Then, Check The Operational Terms

Your lease should support how your business actually runs. Check:

• The permitted use is broad enough for your services, products and future growth
• You can trade during the hours you need, and you're not forced to open when it doesn't suit your business
• You can install signage, equipment, grease traps, exhaust, data cabling or other fitout items you need
• You can assign the lease or sell the business if your plans change
• You have enough time for fitout approvals before rent starts

If any of these are missing, raise them before the lease is drafted. It's much easier to add a clear special condition now than to renegotiate after the landlord's lawyer has prepared a long document.

Which Terms Can Lock In Commercial Risk Early?

The terms that usually lock in the most risk are rent reviews, incentives, guarantees, options, fitout obligations and make good.

These are the clauses that can look simple in a one-page offer but become expensive once your business is operating from the premises.

Rent Reviews

A fixed annual increase might be predictable, but it can add up quickly. CPI increases can move with inflation, while market reviews can create uncertainty. Be cautious if the offer says rent will increase by "the greater of CPI and 4%", because that usually means you'll never get the benefit of a lower CPI figure.

Incentives

If the landlord offers a fitout contribution or rent-free period, the offer should say:

• The exact amount or period
• When it will be paid or applied
• Whether it's conditional on you opening by a certain date
• Whether you must repay it if you assign, default or leave early

Guarantees And Security

If you're signing through a company, the landlord may ask for a personal guarantee from directors. That can put personal assets at risk if the company can't meet the lease obligations. You may be able to negotiate a lower bank guarantee, a shorter guarantee period or a release after good payment history.

Make Good

Make good clauses deal with what you must do at the end of the lease. If the offer says you must return the premises to "base building condition", you may need to remove your fitout, repair surfaces and reinstate services. That can be a major final cost.

What Should A Commercial Lease Offer Include?

A commercial lease offer should include the main deal terms clearly enough that both sides know what they're agreeing before the lease is drafted.

You don't need a 40-page lease at offer stage, but you do need more than "rent is $X and term is Y". A useful heads of agreement lease document should deal with the commercial terms and flag any special conditions.

Here's a practical outline you can use to check what's missing. This isn't a finished legal document, and a lawyer should tailor it before you use it or sign it.

1. Parties: Write the landlord's legal name and your tenant entity, including ACN if you're using a company.
2. Premises: Describe the shop, office, warehouse or suite, including car parks, storage and common areas.
3. Lease Term: State the start date, expiry date and when possession or fitout access begins.
4. Options: Set out each option period and the deadline for exercising it.
5. Rent: Record base rent, GST treatment and when rent starts.
6. Rent Reviews: Specify fixed, CPI or market review dates and how increases are calculated.
7. Outgoings: List what you pay, what is excluded and whether estimates or caps apply.
8. Incentives: Detail rent-free periods, fitout contributions and any repayment conditions.
9. Fitout And Works: Allocate responsibility for approvals, landlord works, services and defects.
10. Permitted Use: Describe your business use broadly enough to cover future offerings.
11. Security: State any bank guarantee, bond, deposit or personal guarantee.
12. Assignment And Subletting: Note whether you can sell the business, assign the lease or sublet.
13. Make Good: Explain what must be removed or reinstated at the end.
14. Conditions: Add conditions such as finance approval, council approval, liquor licensing or board approval if relevant.

If you're negotiating a retail premises lease, also check whether state or territory retail leasing laws apply. For example, retail leasing legislation in NSW, Victoria, Queensland and other jurisdictions can affect disclosure statements, legal costs, outgoings, assignment and dispute processes.

How Do The Numbers Work In Practice?

The numbers work by looking at the whole occupancy cost over the term, not just the first year's rent.

Say you run a cafe in Brisbane and receive a letter of offer for a 5 year lease with a 5 year option. The offer says:

• Base rent is $75,000 per year plus GST
• Outgoings are estimated at $18,000 per year plus GST
• Rent increases by 4% each year
• The bank guarantee is 6 months' rent
• The landlord will contribute $40,000 plus GST to your fitout
• You must return the premises to base building condition at the end

At first glance, you might focus on the $75,000 rent and the helpful $40,000 fitout contribution. But a letter of offer lease review would also look at the later-year rent and the exit costs.

With 4% annual increases, the base rent would be about $87,740 in year 5 before GST. Your first year's rent plus estimated outgoings would be $93,000 before GST, and outgoings may increase too. A 6 month bank guarantee based on rent alone would be $37,500, but if the landlord calculates it on rent, outgoings and GST, the amount could be higher.

The fitout contribution also needs careful wording. If you must repay it if you sell the business in year 3, that affects your exit plan. If make good requires base building condition, you may need to budget for demolition, repairs and service reinstatement at the end of the lease.

The takeaway is simple: the best time to clarify these numbers is before you sign the offer, not after the lease is prepared.

What Should You Negotiate Before The Lease Is Drafted?

You should negotiate anything that changes the commercial bargain, because the landlord's lawyer will usually draft the lease based on the signed offer.

If you wait until lease review stage, the landlord may treat your requests as changes to an agreed deal. That doesn't mean negotiation is impossible, but it can be harder.

Before signing the offer, consider asking for:

• A condition precedent: For example, the offer is subject to board approval, finance approval, council approval or your lawyer's review of the lease.
• A clear rent commencement date: For example, rent starts after practical completion of landlord works, after fitout approval, or on the opening date.
• A cap or exclusion on outgoings: For example, excluding capital works, landlord financing costs and costs not properly recoverable under retail leasing laws.
• A narrower personal guarantee: For example, a cap, time limit or release if the lease is assigned with landlord consent.
• Option rights: For example, a 3 year term plus a 3 year option, with a clear option notice window.
• Assignment flexibility: So you can sell your business without unreasonable roadblocks.
• Detailed landlord works: Including power capacity, plumbing, air conditioning, access, compliance and handover condition.
• Make good limits: For example, remove your loose items and repair damage, but not strip out landlord-approved permanent works.

If you're dealing with a retail lease, ask for the required disclosure materials early. The exact documents and timing depend on your state or territory, so check the local retail leases legislation before committing.

How Do You Review A Lease Offer Step By Step?

You review a lease offer by checking the legal status first, then testing whether the deal works financially and operationally for your business.

Here's a simple order that works well when you're under time pressure.

1. Identify Your Tenant Entity: Decide whether your company, trust or individual name will be the tenant. If you're using a company, check the ACN and authorised signatory details.
2. Read The Binding Wording: Mark up anything saying the offer is binding, non-binding, subject to lease or conditional.
3. Calculate The Total Occupancy Cost: Add rent, GST, outgoings, security, utilities, insurance, fitout and make good estimates.
4. Check The Growth Plan: Make sure the term, options, permitted use and assignment rights suit where your business may be in 2 to 5 years.
5. Check Operational Requirements: Confirm access, signage, services, approvals, licences, parking, delivery areas and trading hours.
6. List Missing Special Conditions: Add conditions for approvals, finance, fitout access, landlord works or board approval.
7. Get Advice Before Signing: If the offer locks in key terms or contains guarantees, get it reviewed before returning it.

Keep a written record of changes agreed with the agent or landlord. If something is agreed by phone, send a short follow-up email confirming it. That way, when the lease is drafted, you have a clear trail showing what should be included.

Templates and standard agency forms can be a useful starting point, but they often miss business-specific issues like fitout deadlines, incentive clawbacks or the exact permitted use. A tailored review can pick those up early.

Key Takeaways

• A letter of offer or heads of agreement can lock in important commercial terms, even if the full lease isn't signed yet.
• Check whether any parts are binding, especially deposits, exclusivity, costs, confidentiality and guarantees.
• Focus on the total cost of occupying the premises, including rent reviews, outgoings, GST, security, fitout and make good.
• Negotiate key terms before the lease is drafted, because it's harder to change the deal later.
• If retail leasing laws apply, disclosure statements, outgoings, legal costs and assignment rules may be affected by state or territory legislation.
• A good lease offer review should protect your cash flow, flexibility and exit options before you're committed.

If you'd like help with reviewing your lease offer, negotiating your heads of agreement, checking your commercial lease terms or understanding your obligations before signing, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.