From both the perspective of a potential Landlord or a tenant, an Agreement to Lease is often an important document that can highlight key points that are in agreement, prior to a Lease being prepared. If done correctly, it can reduce the points of negotiation or amendment that may be necessary after the Lease, as well as the costs involved. However, if not properly drafted, a tenant or a landlord may find themselves either:
- unintentionally bound to a lease or lease terms; or
- being unable to enforce the Agreement once the other party decides to not proceed.
When should there be an Agreement to Lease?
An Agreement to Lease is common for both commercial and retail shop leases as it allows the parties to agree on key terms prior to a Lease being drafted. It is especially common when there are remaining conditions, which prevents the immediate start of a Lease including:
- fit-outs or other works required by the Landlord or Tenant prior to commencement;
- an existing Lease yet to expire; or
- finalising the conditions required before a Lease can commence such as:
- In a Retail Shop Lease – review of the Landlord’s disclosures;
- Deposit requirements;
- Bank Guarantee or cash bond; and
- Evidence of insurances as agreed.
What is included in an Agreement to Lease?
While an Agreement to Lease serves as a precursor to a Lease to be executed (and registered if required), key elements should still be specified including:
- Parties’ details;
- Rent and review amount;
- Estimated Outgoings and the tenant’s required contribution;
- Term including any options for renewal.
If specific work or condition is required during the period between the signing of the Agreement to the Lease being formalised, then those conditions should also be specified within the Lease.
I have changed my mind since signing the Agreement to Lease – is it binding?
Whether an Agreement to Lease is binding on the parties will depend on if the agreement intends to bind the parties and if there are any conditions to be fulfilled beforehand.
Commonly, the Agreement to Lease will not be binding immediately on the parties but will instead be binding upon specified conditions being fulfilled. Examples of conditions, per the above paragraph, can include the tenant’s requirement to pay a deposit or the fit-outs being completed within a certain time frame.
In other cases, the Agreement may make it clear that no parties intend to be bound to the Agreement to Lease until the formalising and the signing of the Lease itself. In this case, the Agreement to Lease serves as a drafting tool for the Lease in the current points that are in agreement. Such Agreements may set out the rights of termination, including a right to terminate if a Lease is not formalised within a specified time frame.
Lastly, an agreement can intend for the parties to be immediately bound upon signing. In a Queensland case in Colvin v Lennard & O’Brien the prospective tenant withdrew from an agreement two days after signing an agreement to lease. The Court found that the agreement intended for the parties to be bound on the basis that the agreement:
- contained all key terms including the property, the parties, the lease period (including the commencement date), rent & outgoings; and
- contained signing clauses by both parties in the form of an execution page that was akin to an offer and acceptance.
While the agreement contained conditions to be fulfilled before the Landlord passed on the possession of the Premises, it had no conditions precedent for it to be binding.
As the landlord in the case was unable to find another tenant from July 2006 to January 2007, the tenant was ordered to pay the equivalent rent and outgoings plus interest totalling over $150,000 plus costs.
To avoid a similar catastrophe arising from an Agreement to a Lease, it is important to ensure that all key terms are highlighted and understood by seeking legal advice, especially as many agreements are prepared by one of the parties or a commercial agent that may be involved.
If you have any concerns before signing an Agreement to Lease and whether the agreement will be immediately binding on you, please do not hesitate to contact us at firstname.lastname@example.org