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.
Jump to:
- What is an agreement for lease?
- What is the difference between a lease and an agreement for lease?
- Are agreements for lease legally binding?
- When do you need an agreement for lease?
- What should you include in an agreement for lease?
- Agreements for lease and SDLT or LTT
- Agreement for lease and contracting out of security of tenure
- Terminating an agreement for lease
- Summary
What is an agreement for lease?
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.
What is the difference between a lease and an agreement for lease?
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.
Are agreements for lease legally binding?
Provided the agreement satisfies the standard requirements to be considered to be a contract, set out below, then it will be legally binding:
- Offer and acceptance – there is an offer and acceptance of that offer (i.e. an offer of the lease from the landlord and an acceptance by the tenant to take the lease).
- Intention to create legal relations – the parties intend to enter into a contractual obligation.
- Consideration – there is some form of exchange of money or services (a nominal £1 will normally satisfy this, or it will be entered into as a deed, which, for technical reasons beyond the scope of this article, is sufficient to dispense with the requirement of consideration).
- Capacity – the parties to the agreement have the capacity to enter into it.
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.
When do you need an agreement for lease?
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:
- upon obtaining planning permission for the tenant’s proposed use of the premises; or
- upon completion of the surrender of an existing lease before the tenant enters into the new 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).
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What should you include in an agreement for lease?
Although it will not contain substantive provisions, the agreement for lease often covers key terms that the landlord and tenant have agreed will form part of the formal lease, including:
- Names and contact details of the landlord, tenant, and any other involved parties such as guarantors
- Description of the property, premises or land to be leased, including any specific features or amenities
- Intended use of the property by the tenant with reference to planning classes and any restrictions on use
- Intended duration or term of the proposed lease
- Agreed rental amount and details on rent-related provisions such as any service charges and rent reviews, and insurance (which is usually reserved as rent)
- Obligations, reserved rights and or restrictions in relation to key areas such as repair and maintenance, assignment or subletting of the premises
- Confidentiality provisions to protect any sensitive information shared between parties during negotiations
- Circumstances in which the agreement for lease may be terminated by either party
- Any specific conditions that need to be met in order to grant the formal lease, as well as the process for meeting these conditions and expected timelines.
- Where the agreement for lease is contingent on a specific event, a 'long stop' date is typically included. This date serves as the deadline for completing tasks like construction work and finalising the lease agreement.
Agreements for lease and SDLT or LTT
Stamp duty land tax (SDLT) is a tax on land transactions in England and land transaction tax (LTT) is a tax on land transactions in Wales.
If a lease is granted for a sufficient length of time with a high enough rent (or a premium being paid on completion of the lease), then SDLT or LTT may be due. It is not usually due until completion of the lease takes place unless the lease is ‘substantially performed’ before that date. There is some guidance as to what generally constitutes ‘substantially performed’ for SDLT or LTT purposes.
Depending on the circumstances, if the agreement for lease is deemed to have been ‘substantially performed’ then the SDLT or LTT due under the lease (if any) will be payable at that point (even though the lease itself hasn’t actually been completed). If the lease is not subsequently completed, then the tenant may contact HMRC within 12 months to reclaim any SDLT or LTT paid (plus interest).
Agreement for lease and contracting out of security of tenure
If the lease is to exclude the tenant’s statutory right to request a new lease at the end of the lease term, it is important that the contracting out procedure is carried out before the tenant is contractually bound to take a new lease, which would be before the agreement for lease is entered into.
Terminating an agreement for lease
Whilst parties will generally enter into the agreement with the full intention of ultimately completing the lease, unforeseen circumstances may arise that impact the desire, or ability, of the parties to proceed to completion.
A ‘longstop date’ should be added to the agreement. This means that if by that date, the condition in question has not occurred, then the agreement may be terminated. It will be down to the specific circumstances and the negotiation of the parties as to whether it will be only the landlord, the tenant, or both who can terminate the lease agreement at that point. The agreement will also need to cover what will happen to any deposit paid by the tenant and whether it should be returned.
The agreement may include caveats to slightly extend the longstop date, but there should always be an ultimate longstop date which, by that point, if the condition has not been satisfied the agreement can be terminated. Without the inclusion of a longstop date, it could mean that both parties could be indefinitely tied into a contract.
An agreement should also include an ability to terminate in the event of the tenant becoming bankrupt, insolvent or steps are taken to make the tenant bankrupt or insolvent, as a landlord will have little chance of enforcing the obligations in the agreement or, ultimately, recovering rent from a bankrupt or insolvent tenant.
Summary
An agreement for lease is a useful tool to employ if you are looking to secure a lease in the future, but still need some time to conduct negotiations and or make other arrangements before committing to the full lease. It is often used in commercial property where the premises to be leased are not yet constructed but the tenant wants to secure a plot, works need to be carried out in preparation or some other consent / permission is required before the full lease can be entered into. The agreement for lease is intended to provide peace of mind for both parties (the promise of future income for the landlord and a property to occupy for the tenant). While entering into an agreement for lease typically leads to the signing of the lease in the future, any conditions set out within the document must be met. It is important to remember that while an agreement for lease does not carry the full force of creating proprietary interests in land as per the lease, breaching the same will be treated as any other breach of contract, with damages potentially available.
If you are a landlord or tenant with questions about an agreement for lease, or wondering whether it might suit your circumstances, our friendly team of expert commercial property solicitors are here to help.
