An agreement for lease is a binding agreement between a landlord and prospective tenant. It sets out the rights and obligations of parties and limits the potential of disputes arising. An agreement for lease is most commonly used when premises are not yet ready to be leased because they are still under construction. The document provides certainty for the landlord and prospective tenant and protects the interests of both parties.
This article looks at the reasons why you need an agreement for lease, and what you should include in the agreement.
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 lease. This agreement is commonly used where:
- a building is being constructed or renovated;
- 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; or
- a former tenant still occupies the premises, and the tenant will not move in for some time but wants to secure the premises.
Why Do You Require an Agreement for Lease?
An agreement for lease is an important document because it protects the interests of the landlord and prospective tenant. It creates a binding obligation on the landlord and tenant. This means there is an expectation they will each fulfil their requirements under the agreement.
An agreement for lease is, therefore, beneficial for both parties. For the landlord, it guarantees a tenant and future rental income. For the tenant, it provides certainty of future possession of the premises.
What Should You Include in an Agreement for Lease?
Both 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:
You should make sure to attach the actual lease to the agreement. It should be complete, except for the terms that need to be drafted after the premises are built.
This is important so you understand the terms of the lease before you enter into a binding arrangement.
You should be clear about the scope of work for both the landlord and tenant. You should also include a mechanism to determine the commencement date of the lease.
A ‘sunset’ date allows a party to terminate the agreement if the other party has not met conditions by a specific date.
You should check if the agreement allows you to extend the sunset date due to external factors, such as delays in consent and adverse weather conditions. Such an extension, however, should not be indefinite.
Defects Liability Period
Tenants should ensure the agreement includes a defects liability period. This is the period that begins after the practical completion, which gives the landlord the opportunity to rectify any defects.
This is especially important with newly-constructed or renovated buildings. Generally, tenants want a 6-12 month defects liability period.
Consents as to Permitted Use
Depending on how you intend to use the premises, you may need permission from a third party. Common examples include approval from the council for development or provision of a liquor licence for a business serving alcohol.
It is essential the lease is subject to the parties obtaining the necessary consent. This is so the tenant can use the premises for its intended purpose. The lease should specify who is responsible for acquiring the consent.
If you are entering into a lease before the commencement date, you should 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.
It is also essential that you attach the draft lease to the agreement of lease, to ensure you and the other party understand the terms you are agreeing to.
Was this article helpful?
We appreciate your feedback – your submission has been successfully received.