‘An agreement for lease is more than just shaking hands on the deal with your tenant,’ according to Jeremy Redfern, Partner in the commercial property team with QualitySolicitors Parkinson Wright. ‘If you are spending time and money on redevelopment, you need to know that your tenant is committed and cannot just change their mind and walk away.’
An agreement for lease is the easiest way to do that and Jeremy sets out the key considerations.
When to use an agreement for lease
From a legal perspective, there is nothing to stop you granting a lease without entering into an agreement for lease, but an agreement is often very useful.
Development projects and even large-scale refurbishments can be risky unless you know you have an agreed letting to provide income on completion. If you need finance for your works, your lenders will look for that reliable return when assessing your project.
You might have a tenant occupying property you want to redevelop. They may be willing to move on a temporary basis if they know they have a guarantee of a new lease when the development is complete.
You may not be able to grant the lease until something specific has happened, like getting your landlord to consent to an underletting or getting planning permission for a change of use.
It could be as simple as your tenant just not being ready to move in for a few months. In all of these situations, an agreement for lease gives you and your intended tenant certainty.
Key requirements
To be properly enforceable, an agreement must be in writing, signed by you and your tenant (and your tenant’s guarantor if that is part of the deal) and it must contain all the terms you have agreed. In practice, that means you must agree the lease as well and attach it in draft form to the agreement. This is why it is crucial to involve your solicitor at an early stage because, if you get any of the formalities wrong, you can end up in a dispute about whether your tenant has to enter into the lease.
Making it conditional
A conditional agreement for lease will give your tenant reassurance that they will only have to take up the lease if, say, refurbishment works have been finished or planning permission has been granted. It is important to make sure that you both agree what the conditions will be and who is responsible for satisfying each of them.
One of the most common areas for dispute is how much effort you or your tenant must put into trying to satisfy the conditions. The agreement will usually refer to using ‘reasonable’ or ‘best endeavours’. Best endeavours will require whoever is responsible to take all steps in their power to get the condition satisfied, even if that means acting against their own interests. Reasonable endeavours is less onerous and recognises personal and financial concerns. Instead of pursuing every possible course of action; the person responsible can concentrate on what they reasonably believe is the best way to get the condition satisfied.
Your solicitor can advise you about what this will mean in practice in relation to the specific conditions you have agreed. They will probably also recommend that you steer clear of an obligation to act ‘in good faith’ because we do not yet have a clear understanding of how courts in England and Wales would interpret it.
You need a clear deadline for satisfying the conditions and a date beyond which you and the tenant are free to walk away if the conditions are still not met. You could have an initial target date, with scope to extend if, for example, you are still part way through the planning process, but there should also be a final end or ‘longstop’ date. The agreement must set out whether both you and your tenant have a right to end the agreement after that date and what process you must follow to do so. This usually involves written notice from one party to the other.
Risk and insurance
The agreement should set out who is going to insure during the period before the lease is granted. Once the lease is in place, the landlord usually insures rather than the tenant, so it is usual for the landlord to insure under the agreement for lease as well. If you are carrying out refurbishment or redevelopment works, you will need to insure the works until they are completed. If you need to cater for anything more complex, like a tenant’s fit out being done before the lease is granted, your solicitor will explain how that works.
Transferring the agreement for lease
Like all contracts, agreements for lease may be transferred unless the parties have agreed to limit this. As landlord, you will want to know who your tenant is going to be, so would usually want a provision that the tenant may not transfer its right to take the lease to anyone else. On the other hand, you may want the freedom to sell your land with the benefit of the agreement for lease, especially if it will be some time before the lease is granted. Make sure you discuss this with your solicitor, so the agreement reflects what you are expecting.
How we can help
A well-drafted agreement for lease can give you and your tenant confidence to invest time and money improving a property or getting a new planning permission, as you know there will be a lease granted in the future. Our experienced landlord and tenant lawyers can guide you through the process and make sure your agreement works as you want it to.
For further information, please contact Jeremy Redfern or a member of the commercial property team on 01905 721600 or email worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.