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What is an Agreement to Lease?

You may have heard someone refer to an ‘Agreement to Lease’ when talking about commercial leasing. An Agreement to Lease is commonly used prior to the Property Owner (commonly referred to as the Landlord or Lessor) and Tenant (also referred to as the Lessee) entering into a Commercial Lease where there are conditions to be met before the Landlord can grant the Tenant a lease of the premises.

An Agreement to Lease outlines the requirements that are to be met prior to the Lease coming into existence.

When should an Agreement to Lease be used?

The most common situation where Agreements to Lease are used is where the premises are being constructed for the Tenant to lease. Other common circumstances are:

  • the consent of a third party is required, for example council approval to a particular use of the premises; and
  • an existing building is being substantially renovated.

What issues are normally dealt with in an Agreement to Lease?

The main issues dealt with in an Agreement to Lease are:

  • Draft Lease – it is a good idea to attach the draft Lease to the Agreement to Lease so that the terms of the Lease are clear to the parties and agreed from the outset;
  • Consent of third parties such as councils, government authorities, a licensing authority (for example a liquor licence or a food licence) or a mortgagee (normally a bank) of the premises;
  • Agreed schedule of works – this sets out the extent of the works and which party is responsible for carrying them out and paying for them. It is useful to plans and specifications as this helps each party to understand the extent of the works and can be used as a reference if the parties have a dispute about the works;
  • Timing – the Agreement to Lease should set out clear time frames for the completion of any works or to obtain any required consents; and
  • Sunset Date – It is important that the Agreement to Lease contains a “sunset date” so that if any conditions are not met within a certain time frame, either party may terminate the Agreement.

Completion of works, fit out, or the granting of consent by a third party usually triggers the start of the Lease.

The Lease

As noted above, the Lease is normally annexed to the Agreement to Lease and normally the Agreement to Lease will contain a provision that the parties agree to be bound by the lease once the conditions in the Agreement to Lease have been met. Accordingly, in addition to asking your lawyer to review the Agreement to Lease, you should also ask them to review the terms of the Lease before the Agreement to Lease is signed.

Lease provisions which may require special attention include:

  • options for further terms;
  • the extent of outgoings payable and how they are to be paid;
  • rent review methods – the standard ones being fixed increases, CPI adjustment or market reviews;
  • the permitted use for the premises;
  • insurance provisions; and
  • the Tenant’s “make good” requirements when the lease is at an end.

What are the benefits of an Agreement to Lease?

An Agreement to Lease binds both parties to enter into a Lease on the satisfaction of certain conditions. The benefit being that it creates certainty for the parties in situations where money is to be spent before the Lease commences.

If you would like more information on Agreements to Lease and Leases, whether your Tasmanian property is retail, non-retail, commercial or industrial, please contact us on 03 6332 9353.

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