There can often be circumstances when a landlord and a tenant have agreed to enter into a lease, but it may not be possible (or preferable) to complete the lease immediately. In such scenarios, the parties can enter into a document known as an agreement for lease. This article will explain what an agreement for lease is, what to include in an agreement for lease and how you can terminate an agreement for lease.
As a binding contract, it's important to ensure your agreement for lease aligns with your business interests. Our commercial property solicitors can ensure you make informed decisions and help you throughout the negotiation and drafting process.
An agreement for lease is a contract between two (or more) parties to enter into a lease. The agreement will place a contractual obligation on the respective parties to enter into the lease, either on a fixed date in the future or following the satisfaction of conditions set out in the agreement. To avoid disputes when coming to complete the lease, it is preferable to agree on the form of the lease and attach it to the agreement.
While the lease and an agreement for lease are both legal documents related to the use of property, it is important not to confuse them for one and the same. An agreement for lease is a preliminary agreement between a landlord and a tenant that outlines the intention to enter into a lease agreement in the future. It is a precursor to the actual lease agreement, which usually outlines conditions that are to be met before a formal lease agreement is executed, and the tenant gains possession of the property. As such, the two documents serve differing objectives.
The key takeaway from this is that the agreement for lease is a contract, between the tenant and the landlord, where the landlord agrees (or contracts) to grant a lease to the potential tenant at a future date. The lease, on the other hand, is a deed which creates an interest in land, enabling possession and occupation of the premises. The agreement for lease provides no such rights of occupation, and typically if a tenant wants to commence work on or enter the property in question, the landlord will grant a licence to allow for the same. Whilst breach of an agreement for lease may lead to financial exposure in the form of damages for breach of contract, once the lease itself is in place the implications for non-compliance can be far-reaching for both parties.
Provided the agreement satisfies the standard requirements to be considered to be a contract, set out below, then it will be legally binding:
Failure to enter into the lease when required by the agreement will be a breach of contract and will leave the party who is in breach liable for any losses incurred by the other.
If the parties are ready to complete the lease immediately, then there would be no need for an agreement for the lease. If the lease is to be entered into in six months’ time, the parties may wish to enter into an agreement sooner to provide certainty that the lease will be entered into when required (and that the other party won’t unexpectedly back out). An agreement for lease would be necessary where certain conditions need to be satisfied before the lease is completed, for example, a landlord or the tenant agreeing to carry out works to the premises before the lease is completed.
Landlords will not want to incur the expense of carrying out the works without a contractual obligation from the tenant to enter into the lease once the works have been completed. Without such an agreement, the tenant may simply walk away at any point and the landlord would be left bearing the cost of the works without the benefit of a tenant paying rent once they are complete.
For tenants, they may need to carry out works to the premises but may not wish to have to pay rent whilst the works are being carried out. It could enter into the lease immediately and agree to a rent-free period together with formal consent from the landlord to carry out the alterations. Most rent-free periods are for a set timeframe (such as three months) and, the tenant will then have to start paying rent, even if the premises is not yet ready for the tenant’s use. It may be more appropriate to enter into an agreement for lease where the landlord allows the tenant access to the premises to carry out the works and oblige both parties to complete the lease once the works are complete. A landlord may insist that the tenant pays a percentage of the rent, or the insurance and service charge contributions (if any) whilst it is carrying out the works, on the basis that it is occupying the premises, but this would be down to negotiation between the parties.
There are various other circumstances where an agreement for lease may be suitable. Essentially, whenever some form of action or event needs to take place then whomever is going to the trouble of ensuring those actions or events occur will want contractual certainty that the other party will indeed enter into the lease once they have occurred. Other examples include an agreement to enter into a lease:
From a practical perspective, if a lease is to be entered into on a set date in the future it allows time for the parties to prepare for the move (for example, the tenant will be able to arrange removal vans and utility suppliers and may also be able to arrange publicity, if required).
