When to use agreements for lease
Managing associate Giorgia Clements outlines the circumstances in which agreements for lease may be required, and important considerations to watch out for.
You have found a property, heads of terms are finalised, solicitors are appointed and you are thinking about fit-out plans and completion timings. Now your solicitor is talking about an agreement for lease – what is this, and do you need it?
Straight to lease?
It is often possible to complete a lease without a prior contractual obligation to do so. But sometimes there needs to be a gap between the contractual commitment to enter into the lease and actually entering into it, because matters need to be dealt with after the parties are bound to complete but before they actually do so. This can be done by:
- exchanging an unconditional contract so that completion happens on a fixed date (eg two weeks from exchange); or
- exchanging a conditional contract, where completion takes place once all of the conditions have been met.
Reasons for an AfL
Common situations when an AfL is needed are where:
- the landlord will carry out works before the tenant takes occupation;
- the tenant needs planning permission to change the lawful use of the property or to authorise works; and/or
- the landlord needs to remove an existing occupier before it can grant the lease.
This is a non-exhaustive list; the scenarios in which an AfL might be needed are endless.
Landlord works condition
The property has been left in a dilapidated state; or the landlord has offered to carry out improvements; or perhaps the building does not exist yet.
Tenants often expect landlords to carry out these works during lease negotiations. While this would save time, it would be risky for the landlord, who wants to know that the tenant will take the lease before it spends money on the property; otherwise, the tenant will be free to walk away, leaving the landlord paying for now unnecessary works.
Key points to look out for:
- The works: What exactly is the landlord promising to do? A detailed specification should be appended to the AfL. Contractually, the landlord need only carry out the works in that specification, regardless of whether they told you they would also do other works.
- Timing/termination: What is the deadline for completing the works, and can the AfL be terminated if they are not completed on time? It is common to include a 'target date' for the landlord to achieve, with a later 'long-stop date' to which a tenant’s termination right is pegged. Watch out for landlord rights to terminate – if the landlord has not tried to carry out the works, it should not be able to rely on the lack of timely completion as an excuse to terminate and find a 'better' tenant.
- Practical completion: How will practical completion be certified and will you have any input? If the landlord is certifying PC, you may want final say on whether the works have practically completed (or at least the right to refer to an independent expert if disputed). If the contractor/other professional is certifying, you should attend the final inspection and make representations where works have not been completed properly. Note that PC generally means the works have been completed free of patent defects and/or where minor work has yet to be completed.
- Defects: Who is responsible for fixing defects and when must they do this? Usually the landlord is responsible for defects notified within 12 months of PC, but what happens afterwards? The tenant will likely be responsible for maintaining the landlord’s works following lease completion, outside the initial 12-month period. You should consider:
- Are 'inherent defects' in the works excluded from your repairing liability? If so, is the landlord required to repair inherent defects that arise during the term? If not…
- Will you have warranties or third-party rights from the professional team? Warranties or TPRs should be sought if the landlord is constructing a new building or undertaking extensive works.
Tenant planning condition
If you need planning permission to authorise your use of or works to the property, you should obtain it before lease completion because:
- (a) planning permission might be refused, leaving you paying rent for a property you cannot lawfully use or fit-out; and/or
- (b) the planning process could be lengthy, eating into the lease term and any concessionary rent period.
As the AfL is for your benefit here, the landlord might not agree to it, in which case your options are to complete the lease and apply for planning permission afterwards, or refuse to complete until planning permission is granted, knowing the landlord could let the property to someone else in the meantime.
Look out for the following points:
- Obligations: You will likely be required to submit your planning application by a deadline and keep the landlord informed as to progress. Landlords commonly require that they approve the application before it is submitted; the same might also be true for withdrawals, resubmissions, or other variations to the application.
- Conditions: You will want to ensure the permission is satisfactory, not containing any 'onerous' or 'unsatisfactory' conditions. Would it be satisfactory if only part of your works were authorised, or use of the property was limited to certain days/times of day?
The AfL should list onerous/unsatisfactory matters and you should pay careful attention to this list – if the permission is unsatisfactory for a reason not in the list, you will be required to complete the lease anyway.
- Challenges: The grant of a satisfactory permission should not trigger lease completion – you should require that a set period of time be allowed in case of any third-party challenges. It is usual for AfLs to specify completion six weeks plus 10 working days after the grant of the satisfactory permission, assuming no third-party challenge is lodged during this time.
- Appeals: What happens if permission is refused, or the permission is unsatisfactory? Can you terminate the AfL, or are you required to lodge an appeal first? Can you lodge an appeal, even if you are not required to? The circumstances will dictate what is suitable, but it is important to document what has been agreed.
Vacant possession condition
Lease terms may be agreed before a current occupier has vacated. An AfL is not always necessary here – if the occupier wants to leave, the premises may be vacant before completion without needing a separate 'exchange' process. But sometimes the landlord will want certainty of lease completion before it proceeds with the outgoing occupier’s vacancy, in which case an AfL will be needed.
The main points to watch for are:
- Obligations: What must the landlord do to obtain vacant possession? Success will not be entirely in the landlord’s control so it likely will not accept an absolute obligation to achieve it, but there should be some objective bar as to how hard it must try, eg the landlord might commit to an absolute obligation to serve a break notice, and a 'reasonable endeavours' obligation to obtain vacant possession on the break date.
- Timing/termination: It is common to include a 'long-stop date', so you can terminate the AfL if the landlord has not achieved vacant possession by then. The landlord may have termination rights too, provided it has complied with its obligations as above.
- Property’s condition: Consider the state in which the occupier may leave the property. The landlord may have agreed a dilapidations settlement with the occupier – perhaps it can pay this money to you so that you can put the property back into repair?
Points always relevant for AfLs
If you are entering into an AfL you should always consider the following:
- Termination rights: AfLs typically entitle the landlord to terminate if the tenant defaults or becomes insolvent. Insolvency is usually uncontroversial but be careful about default-related termination rights. Is any default, immaterial or otherwise, a sufficient trigger? Having incurred so much time and cost before exchange, you will want to know the landlord cannot walk away because of some minor breach of the AfL. And should you have a right to terminate in the event of the landlord’s default?
- Licence to alter: Usually, fit-out plans are submitted to the landlord for approval between exchange and completion, with approval documented by completing a licence to alter following lease grant. The tenant will be prohibited from starting works until the LtA completes. It is in the tenant’s interests to complete the LtA simultaneously with the lease to ensure the landlord actually approves the works, and so as not to waste any rent-free period in delaying works/dealing with the LtA post-completion.
Landlords rarely agree to make simultaneous completion of the LtA a condition of lease completion, because provision of fit-out plans is largely under the tenant’s control. From the tenant’s perspective, such an AfL condition would serve the dual purpose of encouraging the landlord to approve the works, and to formalise that approval (and authorise the start of the works) at the earliest opportunity.
It is therefore common, particularly in major lettings, to agree the dates by which each party must have completed certain actions. For example, the tenant being required to submit plans six weeks before completion, with the landlord confirming their approval (or explaining reasons for withholding approval) within 10 working days of receipt, with a resubmission and reapproval process as needed.
Some landlords dislike this formulaic approach, especially where the tenant’s proposals may include complex works. In such cases, it may be appropriate for plans to be submitted/approved before exchange (representing a cost risk for the tenant), or perhaps an extension to the concessionary rent period if the landlord behaves unreasonably.
- Waiver: Can either party waive any of the conditions to lease completion? Waiver rights can be appropriate, provided the right person is entitled to waive the right condition. For example, the tenant may want the right to waive receipt of a satisfactory planning permission before the lease completes; however, the landlord should not share in this waiver right.
- Early access: Do you need access to the property before lease completion? The landlord might accept this, but your pre-lease occupation will be as 'licensee' only, so that access right might be terminated at short notice, making this period of access fairly risky.
Often a tenant will be limited in what it is allowed to do during this early access period. Also, watch for how early access affects lease dates. For example, it might be appropriate for the rent-free period start date to be brought forward to the date of access, but that will depend on the circumstances.
AfLs can be useful in many situations, but they often deal with bespoke scenarios and accordingly require careful negotiation. You should ensure you fully understand the implications of entering into your AfL (liaising with solicitors as needed) before committing to exchange.
This article was originally published in Estates Gazette in May 2023.
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