Agreement to lease. What is it?
There are circumstances, when a premises is not yet ready for the Tenant to move into however the parties (Landlord and Tenant) still wish to enter into an agreement for a future lease.
When this is the case, the parties must enter into something called an Agreement to Lease as they are unable to enter into a traditional lease. This is because a traditional lease requires possession be given to a Tenant immediately.
An Agreement to Lease allows both the Landlord and Tenant to enter into a binding agreement that specifies the essential terms of the lease prior to that lease document being signed (a copy of which is generally annexed to the Agreement to Lease). This allows both parties to have confidence that the lease terms are already agreed upon when the premises are ready for the tenant to move into.
If you are a Landlord undertaking substantial renovation or building work to a premise, an Agreement to Lease gives certainty that your investment will result in a benefit in rent when the Tenant moves in. Additionally, the Tenant has confidence that when the premises is ready for occupation, they have the right to lease it.
Agreements for Lease are commonly used in the following circumstances:
- The Landlord is yet to acquire the property and it is waiting for settlement;
- The premises are currently being constructed, renovated or revamped;
- Another Tenant is currently in occupation and the new Tenant wishes to secure the new lease while the current term is still running; or
- Any other situation where the Landlord cannot provide possession to the Tenant immediately.
Consent is an important consideration
A common issue businesses face is obtaining the relevant consents from the Council or another regulatory body which allow them to operate their business. The Agreement to Lease allows the parties to obtain these various consents and/or planning approval prior to the commencement of the lease. This means that the Tenant’s business can be fully operational when the lease begins.
Parties may also include clauses in the Agreement to Lease that allow them to terminate if they could not obtain some or all permits/consents (after making their best endeavours to do so). These provisions reduce the risks to the Tenant by ensuring that they are not bound to a lease for a business premises in which they cannot operate their business due to consents being denied to them.
Fit Out Works
In some instances, the Agreement to Lease will have provisions that cover what construction or renovation work the Landlord must complete by the commencement of the lease. This allows the Tenant to have a good understanding of precisely what the premises will look like on completion and the Landlord’s installations. Tenants may also have fit out obligations that can be documented in the agreement. Fit out provisions give each party certainty on what their obligations are in relation to construction works, fixtures and fittings and the timeframe in which they must be completed, and which party is responsible for such costs.
An Agreement to Lease will generally include a sunset date clause within its terms. Typically, these terms allow either party to terminate the Agreement to Lease (which means they are not required to enter into the lease) after a certain period of time has elapsed. These times frames will depend on what consents each party must obtain, and the extent of the Landlord and the Tenants construction and fit out work. The advantage of this clause is that it allows either party to walk away if the entire project is detrimentally delayed and they wish to move on without proceeding.
Mock Case Study
- The ABC Company has recently purchased and settled on land in Melbourne.
- The ABC Company intends to construct a childcare centre on the land and lease it to a tenant.
- As The ABC Company will be building a purpose-built facility that cannot be used for any other purpose and will require the relevant planning approvals from Council for the use and development of the land, and service approval for the number of childcare places from the relevant authority pursuant to the Childcare Laws (Education and Care Services National Law Act 2010 and state legislation and regulations enacted pursuant to that Act), The ABC Company wants to ensure security of tenure for the premises prior to undertaking the development of the land.
- The ABC Company enters into an Agreement for Lease with XYZ Childcare Operator to clearly define the terms agreed between the parties and to ensure that XYZ Childcare Operator takes possession of the property once construction is completed and the necessary approvals and consents obtained.
- As XYZ Childcare Operator has negotiated with The ABC Company early on, the terms of the Agreement for Lease include a fit-out design that XYZ Childcare Operator have been involved in and the landlord has agreed to cover the costs of the fit-out as part of it’s construction.
- At the time of entering into the Agreement for Lease, the parties have also prepared a Lease which clearly defines the terms and conditions which will take effect upon commencement of the Lease (at the conclusion of the Agreement for Lease).
An Agreement to Lease allows the Landlord and Tenant to prepare for the future in advance of the premises being ready for occupation. For this reason, it can have great utility. However, these documents can be quite complex, and therefore it is critical that you engage a property lawyer with the necessary skills and expertise to either prepare the Agreement to Lease or to advise you on these types of agreements. In this way you avoid any property disputes or building disputes in the future.
The Property lawyers at Burke & Associates Lawyers have extensive experience with these types of arrangement, including in relation to childcare and healthcare property and property development. Whether a Landlord or a Tenant we can assist you with any of your requirements. Please contact Kristy Muhlhan, Principal and head of our Property Division for further assistance. Alternatively you can contact our switchboard on +61 3 9822 8588 and they will be able to direct you to the best lawyer for your needs.