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. In this article we’ll consider, amongst other things, what an agreement for lease is and when its use may be appropriate.
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.
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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 the form of the lease and attach it to the agreement.
When do you need an agreement for lease?
If the parties are ready to complete the lease immediately, then there would no need for an agreement for lease. However, if the lease is to be entered into in say 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 also be necessary where certain conditions need to be satisfied before the lease is completed, such as either the landlord or the tenant having agreed to carry out works to the premises before the lease is completed.
From a landlord perspective, it will not want to go to 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.
From a tenant perspective, it 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 a rent-free period together with a formal consent from the landlord to carry out the alterations. However, the rent-free period is usually for a set time-frame (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 whereby the landlord allows the tenant access to the premises to carry out the works then 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).
Are agreements for lease 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.
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 on 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 exercise the ability to terminate the 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.
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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.
Agreement for lease vs tenancy agreement
An agreement for lease is simply a contract between two parties to enter into a lease at some point in the future. It may grant the tenant a licence to enter into the premises to carry out works, but it is not a tenancy (i.e. a lease) in itself and does not allow the tenant many rights over the property.
A licence in an agreement for lease will be a personal agreement between the parties and will not grant the tenant exclusive use of the premises. Indeed, an agreement for lease may not even include a licence to allow the tenant access to the premises. Put simply, an agreement for lease is a pre-curser to a lease and may allow the tenant temporary access to the premises to undertake certain works or tasks to enable the lease to be entered into, but it should not, in itself, be relied on by a tenant for long term occupation of premises.
