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Why do I need an Agreement to Lease?
When renting business related property it is important for both landlords and tenants to understand the relationship they are entering into and, their respective rights and obligations. The document that governs this relationship is usually called a commercial lease.
An Agreement to Lease is often executed prior to a commercial lease coming into effect, particularly in circumstances where there are things to be done before the landlord gives the tenant exclusive possession of the premises.
Such an agreement documents each party’s rights and obligations and sets out requirements to be satisfied prior to the terms of the actual lease taking effect.
An Agreement to Lease can be very useful for both landlords and tenants, and it is important to understand the rights and obligations of each party.
Another document frequently presented to prospective tenants is an ‘Intention to Lease’ or a similarly titled agreement. Such a document may be intended to be binding, or may expressly provide that it is not binding. If it is to be binding on the parties it is vital that you seek advice about its terms, before you sign it.
We are all too frequently requested to advise on the terms of leases or agreements to lease, only to find the client has already signed a binding ‘Intention to Lease’ or ‘Heads of Agreement’ or ‘Expression of Interest’ without realising it has bound them to sign some other document (or agree to terms in a later document).
We cannot emphasise too strongly the importance of obtaining advice regarding your obligations under a lease or any pre-cursor to a lease before you sign it.
When to use an Agreement to Lease
An Agreement to Lease is often used when:
- the tenant needs to obtain consent from someone, eg for a particular use of the premises
- the premises are being purpose-built for the tenant; or
- an existing building is being renovated before the tenant moves in; or
- the current tenant may be moving out but has not given up possession.
Completion of the works to the premises, fit out, consent or delivery of vacant possession is usually taken into account in setting the start date of the Lease.
The benefits of an Agreement to Lease
An Agreement to Lease creates a binding obligation on both parties to enter into a lease on agreed terms, subject to agreed conditions being completed. This creates more certainty for the parties, particularly if a significant sum is to be spent by either or both parties before the Lease commences.
If you are a landlord undertaking building and renovation work to rental premises it may well involve a significant cost to you, in time and resources. It is a period of down-time where no rental monies are received and is best kept to a minimum. You may have to obtain Council approval for building work, which takes time, and you may have to contract with and co-ordinate tradespeople to complete works.
If you are a tenant you will want to make the best possible use of the premises from the date you are required to pay rent, and being able to complete these works before the Lease commences may be very important.
Issues commonly covered
Consents
If the premises are not tenanted or the use of the premises is changing you may need to apply to Council or some other authority for consent to use the premises for a particular use.
Consent may also be required from a mortgagee of the premises or a licensing authority if the business requires a licence to operate.
Obtaining such consents can take time.
Fit out works
A Works Schedule is often attached to or contained in the Agreement to Lease, and sets out what works are to be done and who is obliged to undertake the works – landlord or tenant.
Often plans and specifications are attached to the Agreement and this is useful in the event that the landlord and the tenant have a difference in opinion of what exactly is required.
The tenant is usually responsible for some of the fit out items, or the landlord may direct the tenant as to how the premises must be fitted out. In a shopping centre for example, the landlord may have design guidelines that the tenant must follow when fitting out the premises. If the tenant has control over the design of the premises then they are often required to get permission from the landlord for the works and provide plans and design drawings to the landlord for approval.
If the tenant is doing most of the fit out the landlord will often specify a commencement date for the Lease, even though the tenant’s fit out may not be completed. The tenant should be organised as early as possible with design and trades to minimise the period that they are paying rent but may not be open for business.
Time frames
The Agreement to Lease will usually have specified periods for completion of conditions, as the works or consents will usually have to be completed prior to the Lease commencing.
Delays may occur and it is important that a workable time frame is in place prior to entry into the Agreement to Lease.
The tenant should also ensure that there is a “sunset date” in the Agreement to Lease in case works being undertaken by the landlord are not completed in time, or required consents have not been given. The tenant may then be able to terminate the Agreement and find alternate premises, rather than being delayed further.
Other provisions
The Agreement to Lease should have a copy of a draft Lease attached to it, so that the terms of the Lease are clear to the parties and agreed from the outset.
The terms of the Lease should be reviewed by your lawyer before an Agreement to Lease is signed.
Common provisions in a Lease which may require review include:
- the commencement date (which may be the “hand over” date),
- any options for renewal,
- the rent payable,
- rent review dates and method (often CPI adjustment, or a specified percentage),
- outgoings and promotional costs payable,
- the permitted use of the premises,
- insurance and guarantee requirements,
- works to be completed by each party and time frames for works completion, de-fit costs or what the tenant must do to “make good” the premises when they vacate.
Attachments to the Agreement to Lease may include a “works schedule”, and plans and specifications (including allocated car parking).
If you or someone you know needs more information or needs help or advice, please contact us on (07) 5443 4866 or email kwaddington@gwlaw.com.au.
Ken Waddington
Partner
(07) 5443 4866
Nicole Downs
Solicitor
07 5443 4866