In Short
- An agreement for lease is a legally binding contract between a landlord and a prospective tenant, often used when a property is still under construction or requires approvals.
- It sets out key conditions such as fitout responsibilities, approvals, and deadlines, reducing the risk of disputes.
- Important clauses include the sunset clause (to prevent delays), defects liability period (to ensure quality), and consents for permitted use (to confirm legal approvals).
Tips for Businesses
Before signing an agreement for lease, ensure all terms are clear. Attach the lease, outline work responsibilities, and set realistic deadlines. Check if you need council or regulatory approvals. A well-drafted agreement protects both parties, so seek legal advice to avoid costly issues later.
An agreement for lease is a binding agreement between a landlord and a prospective tenant. It sets out the rights and obligations of parties and limits the potential for disputes. This is most commonly used when premises are still under construction and not ready to be leased. The document provides certainty for the landlord and prospective tenant and protects the interests of both parties. This article looks at why you may need an agreement for a lease and what you should include in the agreement.
This guide will help you to understand your options when you purchase a business with leased premises.
When Do You Require an Agreement for Lease?
If a landlord and prospective tenant need to satisfy requirements before a lease takes effect, they should draft an agreement for the lease. This agreement is commonly used where:
- a building is being constructed or renovated;
- the tenant is undertaking a significant fitout of the premises to suit their business use;
- the premises are being built for a particular purpose specified by the tenant;
- the tenant requires permission from a third party, such as the council, to use the premises – may require development approval as a pre-condition; or
- a former tenant still occupies the premises, and the prospective tenant will not move in until the landlord has vacant possession in the future. Still, the parties want to secure the premises.
Why Do You Require an Agreement for Lease?
The agreement for lease is an essential document as it sets out the preconditions to entering into a lease. Additionally, the agreement for the lease will set out any works or construction required by both parties before the lease commences. It will also note any incentives the landlord provides and the conditions surrounding them. This is especially useful because if the conditions in the lease agreement are not met, either party may have the right to terminate the agreement, depending on the terms agreed upon. It also allows for any relevant remedial actions to be outlined.
Therefore, a lease agreement benefits both parties. For the landlord, it binds a tenant to enter into a lease. For the tenant, it provides certainty of future possession of the premises.
Continue reading this article below the formWhat Should You Include in an Agreement for Lease?
The landlord and tenant are vulnerable to suffering loss if they have not drafted the agreement for lease correctly. This is what you should include in your agreement:
The Lease
You should attach the actual lease to the agreement. This is important so you understand the lease terms before entering into a binding arrangement.
Fitout Works
The agreement should outline the scope of any fitout or construction works required by either party before occupying or using the premises. It must also include a mechanism to determine the lease’s commencement date.
The agreement should specify the following:
| Who is responsible for the cost of each type of work? | The landlord may cover the cost of essential or structural modifications, while the tenant may bear the expense of customising the interior to their business requirements. |
| Who will carry out the works? | The agreement should state whether the landlord or the tenant is responsible for hiring contractors and overseeing the fitout works. |
| What is the standard to which the works must be completed? | This includes compliance with building regulations, safety standards, and any specific requirements agreed upon by the parties. |
| What are the timeframes and milestones? | The agreement should outline a schedule for completing fitout works. This includes key milestones and the expected date for practical completion. This helps both parties manage their expectations and prepare for the commencement of the lease. |
Sunset Clause
A “sunset date” is a crucial term in an agreement for a lease that sets a deadline by which certain conditions must be met for the lease to proceed. If the specified conditions are not satisfied by this date, either party can terminate the agreement without further liability. The sunset date provides a clear timeline. It protects the landlord and tenant from indefinite delays resulting in financial losses or other complications.
The sunset date is particularly significant when the premises are still under construction or require substantial renovations to be ready for occupancy. For example, suppose the landlord is responsible for completing the construction or fitout by a specific date. In that case, the sunset clause allows the tenant to withdraw from the agreement if the landlord fails to meet the deadline. Conversely, if the tenant needs to secure certain approvals, such as planning permission from the council, and cannot do so by the sunset date, the landlord is not left in limbo indefinitely.
Ensure that the sunset date is reasonable. It must consider potential delays beyond either party’s control, such as:
- delays in obtaining necessary approvals; or
- unforeseen construction challenges.
The agreement should also include provisions for extending the sunset date if such circumstances arise. This extension should not be open-ended. A balance must be struck between:
- allowing enough time for all conditions to be met; and
- ensuring that both parties can exit the agreement if delays arise unreasonably.
Defects Liability Period
The Defects Liability Period is a crucial component of an agreement for lease, especially for newly constructed or renovated premises. It begins after the practical completion of the premises. It allows the tenant to identify and report any defects that arise from substandard workmanship or materials. This period typically ranges from 6 to 12 months, providing the landlord with an obligation to rectify defects without additional cost to the tenant. This ensures that the premises meet the agreed standards and fit the tenant’s intended use. It protects the tenant from unexpected repair costs and minimises disputes.
The agreement should clearly define the duration, scope, and process for addressing defects. It should outline:
- how and when the tenant must notify the landlord of defects;
- the timeframe for rectification; and
- who is responsible for the costs involved.
Additionally, it should address:
- access for repairs;
- specify what constitutes a defect; and
- include provisions for extending the period if necessary.
By setting these terms, the defects liability period ensures both parties understand their rights and obligations. This facilitates a smoother and more secure leasing experience.
Consents as to Permitted Use
Consents as to Permitted Use are essential components of an agreement for lease. This is particularly important when the premises’ intended use requires third parties’ approval. This could include:
- obtaining permissions from local councils for zoning or land use; or
- specific licences, such as a liquor licence for businesses serving alcohol.
The agreement should clearly state that the lease is conditional upon the tenant securing all necessary consents and approvals before it commences. This guarantees that the tenant can:
- conduct their business legally; or
- utilise the premises for its intended purpose without encountering legal or regulatory issues later.
The agreement should also specify who is responsible for obtaining these consents. In some cases, the landlord may assist in securing approvals. In other scenarios, the tenant may need to handle the process independently. It is essential to outline the timeframe within which these consents must be obtained and the steps to be taken if delays occur.
Key Takeaways
If you are entering into a lease before the commencement date, consider drafting an agreement for lease. The agreement should include:
- the scope of work;
- a sunset clause;
- the defects liability period clause; and
- a list of the consents to obtain.
You must attach the draft lease to the lease agreement to ensure you and the other party understand the terms you are agreeing to.
If you need help drafting or reviewing your lease and agreement for lease, our experienced leasing lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
An agreement for lease is a legally binding contract between a landlord and a prospective tenant. It sets out the rights and obligations of both parties and helps prevent disputes. It is commonly used when the premises are still under construction and not yet ready for leasing.
If a tenant cannot secure necessary approvals (e.g., council permits), the lease may not proceed. The agreement should outline who is responsible for obtaining approvals and what happens in case of delays.
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