Agreement for lease: guide for commercial property leases

When dealing with commercial property transactions, an agreement for lease (“AFL”) is a critical document that can significantly impact both the landlord and the tenant.  

This article aims to provide a comprehensive understanding of agreements for lease, their purpose, and the key elements involved.

What is an agreement for lease?

An agreement for lease is a legally binding document between a landlord and a tenant, outlining the terms and conditions under which a lease will be granted on a date in the future. An agreement for lease is different from a lease, as the agreement for lease serves as a commitment by both parties to enter into a lease once certain conditions are met.  If the conditions for completion of the lease are not met, the lease may never be entered into.

Agreement for leases are commonly used in situations where the property is still under construction or requires significant alterations before occupancy.

Note that business tenants in England and Wales have certain statutory rights to remain in occupation of premises, pursuant to the Landlord and Tenant Act 1954. The parties may agree to exclude these statutory provisions. To do so, the parties will need to go through certain statutory steps prior to entering into the agreement for lease.  If these steps are not followed prior to the agreement for lease being exchanged, the tenant may acquire statutory rights to remain in occupation after the expiry of the contractual term of the intended lease. 

Note also that it may be possible for a tenant to assign or transfer the benefit of an agreement for lease to a third party prior to completion.  This means that a different tenant entity may take the lease when the conditions for completion are met.  If a landlord wants to avoid this, it is possible to take steps to prevent this with careful drafting.

A commercial property lawyer will help you to navigate these points.  Legal advice should always be sought prior to entering into an agreement for lease. 

Purpose of an agreement for lease

The primary purpose of an agreement for lease is to provide certainty and clarity for both parties before the formal lease is executed.  It sets out the obligations and responsibilities of the landlord and tenant, ensuring that both parties are aligned on key terms such as rent, lease duration, and completion of any necessary works.

Note that, there may be tax consequences for the parties entering into an agreement for lease, and advice should always be sought from a commercial property lawyer or property tax specialist in advance.

Key elements of an agreement for lease

1. Conditionality: Agreement for leases often include conditions that must be satisfied before the lease can be executed. The agreement for lease will also detail who is responsible for satisfying those conditions, and the timeline for that delivery. Common conditions include obtaining planning permissions, completing construction works, or securing vacant possession. These conditions protect both parties by ensuring that all necessary requirements are met before the lease begins.
2. Specification of works: If the property requires construction or alterations, the agreement for lease will include detailed plans and specifications of the works to be carried out. This ensures that both parties have a clear understanding of the scope, quality, and timeline of the works.
3. Rent and lease terms: The agreement for lease will outline the agreed rent (or set out the basis on which the rent is to be ascertained), payment terms, and duration of the lease.  This includes any rent-free periods, rent reviews, and provisions for service charges or maintenance costs. 
4. Longstop date: A longstop date is a deadline by which all conditions must be met, and the lease must be completed.  If the longstop date is not met, then either party may have the right to terminate the agreement without penalty, provided they have complied with their respective obligations.
5. Pre-letting obligations: The agreement for lease may include obligations for the tenant to carry out certain tasks before taking possession of the property, such as providing a rent deposit or guarantor.
6. Dispute resolution: The agreement for lease should include mechanisms for resolving disputes that may arise during the period leading up to the lease completion. This can include mediation, arbitration, or other methods.

What is the difference between an agreement for lease and an option agreement?

These two types of transactions serve quite different purposes:

• Agreement for lease – An agreement for lease is a binding agreement where both parties commit to entering into a lease in the future, subject to certain conditions being met.
• Option agreement – An option agreement gives one party (usually the prospective tenant or buyer) the right, but not the obligation, to enter into a lease or to purchase a property within a specified time frame.  It provides flexibility without a binding commitment.

Benefits of an agreement for lease

1. Certainty and security:  Where it is not possible to grant a lease straight away, agreement for leases provide both parties with the assurance that the lease will be granted once certain specified conditions are met, reducing the risk of misunderstandings or disputes.
2. Clarity on obligations: By outlining the responsibilities and expectations of both parties, agreement for leases help to ensure that the landlord and tenant are aligned on all key terms before the lease begins.
3. Flexibility: agreement for leases allow for flexibility in negotiating terms and conditions, providing an opportunity for both parties to address any concerns or requirements before the lease is formally completed.

Conclusion

Agreements for lease are essential instruments in commercial property transactions, offering a framework for both landlords and tenants to ensure that their interests are protected, and expectations are aligned. By understanding the key elements and benefits of agreement for leases, parties can navigate the complexities of commercial leasing with greater confidence and certainty.