Entering into a Lease is one of the biggest business commitments
many tenants make. Understanding the provisions in both the Lease,
and any preceding Agreement for Lease, is essential for avoiding
potentially serious and costly consequences as either a tenant or
landlord. This article provides an overview of the difference
between a Lease and an Agreement for Lease, discusses when an
Agreement for Lease might be used and introduces some matters
routinely covered within Agreements for Lease.
What is a Lease?
A Lease grants an interest in land and/or buildings by granting to a tenant the right to exclusive occupation and use of the premises. A Lease does not need to commence immediately – it can be for a future time-period; however, all of the components considered necessary to grant the Lease should be able to be determined with certainty when the Lease is signed. In reality it is not always possible to have the required level of assurance over all such variable elements in advance of signing; in these instances an Agreement for Lease is deemed necessary.
What is an Agreement for Lease?
An Agreement for Lease is a contract between the landlord (or lessor) and the tenant (or lessee) in which the landlord agrees to grant a Lease to the tenant at a future date, on the terms and conditions set out in the Agreement for Lease. The Agreement for Lease (with a copy of the actual Lease to which it refers, attached) allows for future completion of any variables in the Lease that cannot be determined at the date the parties –landlord & tenant - enter into the Agreement for Lease.
When would an Agreement for Lease be used?
Agreements for Lease are generally used in circumstances where there are conditions to be satisfied before the actual Lease can commence. Common situations necessitating use of an Agreement for Lease include:
- A tenant has agreed to lease premises that are not yet constructed
- The landlord has agreed to carry out works on behalf of the tenant
- The tenant needs to obtain the consent of someone prior to using the premises
Matters routinely covered in an Agreement for Lease
Agreements for Lease deal with a range of different matters too numerous to cover fully in this brief introduction; however, some of the more common subjects include 'Fit-out work', 'Consents to use' and 'Incentives', each of which is explained further here:
Key issues dealt with in most Agreements for Lease are construction of premises, subdivision of land to create premises and fit-out of premises. Where premises are yet to be constructed or land subdivided, then the following important considerations may be set out in the Agreement for Lease:
- A mechanism for determining the exact area of the premises
- A calculation to determine the rental amount in circumstances where the parties have agreed to a rental based on a rate per square metre
- A mechanism for determining the commencement date of the lease*
- A mechanism for governing the scope and standard of the works being carried out*
- Any sunset date by which the landlord must complete the works, failing which the tenant will be entitled to terminate the Agreement for Lease*
- Any mechanism by which the sunset may be extended to take into account external build factors such as inclement weather, industrial action and Council consents*
Where premises have already been constructed but the landlord is undertaking certain fit-out works for the tenant, points asterisked (*) above are of particular importance.
Consents to use
Where tenants intend using premises for specific purposes other than merely being commercial offices, consent from the local Council may be required, as well as other consents in specific circumstances such as childcare centres and liquor-licenced premises.
In such circumstances it is critical that the lease of the premises is subject to the tenant obtaining those consents, regardless of whether the consents are facilitated by the landlord or are the tenant's responsibility. Both parties must carefully consider and agree who is responsible for acquiring relevant consents and the impact any delay in getting those consents will have on the commencement date of the lease or any other factors.
In addition, the issue of any head lessor or mortgagee consent that may be required should also be considered in the Agreement for Lease, as well as the costs involved in obtaining those consents.
It is common practice for landlords to offer tenants an Incentive (e.g. rent-free period, contribution to fit-out or removal expenses) encouraging them to enter into a Lease of premises. Incentives can often be quite valuable and for long-term leases can amount to 20% or more of the total rent payable by the tenant under the lease. Incentives are generally covered within an Agreement for Lease only when that Agreement for Lease is being created for other purposes (e.g. Consents, Fit-out). If there are no other specific reasons for drawing-up an Agreement for Lease substantial incentives would, in that circumstance, usually be handled within an Incentive Deed; for smaller incentives, the parties may elect to cover the details within the actual Lease itself, saving on legal costs associated with drafting and negotiating a separate deed, although that is generally not an appealing option for a landlord as that document will, in many states, be available for public inspection.
Important considerations to be documented in relation to Incentives are:
- The form the incentive will take such as rent free or fit-out contribution
- The trigger for payment of or provision of the incentive
- Any limitations on payment or provision of the incentive such as breach of the lease
- Any repayment requirements for the incentive in circumstances where the lease is terminated early or assigned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.