An agreement to lease is an agreement between a landlord and tenant of commercial property. It gives the parties an opportunity to record their leasing arrangements before they are formalised in a deed of lease.
There are many details to be worked through between parties to a lease. The agreement to lease should set out most of the details between the parties so when it comes to signing the deed of lease there is no confusion or discrepancy.
What should be included?
The agreement to lease needs to clearly identify the parties to the agreement and the premises to be leased.
In addition, it should record the annual rent, any reviews of the annual rent, the term of the lease, any renewals of the lease as well as a commencement date and the details of any guarantors required.
Many agreements contain much more detail than just the above basics. The agreement to lease provides an opportunity to address matters arising prior to lease commencement, such as due diligence or consent conditions, the specification for works to be completed by the landlord and/or the tenant, and the period allowed for fit out (rent free or otherwise).
ADLS agreement to lease form
Many agreements to lease are in a standard form (Auckland District Law Society – ADLS). This has a clause in the fine print which requires a formal deed of lease to be prepared, and, until that deed of lease is prepared and signed, the terms of the ADLS lease will apply to the parties.
This is a critical clause as it binds the parties to a document (being the latest edition of the ADLS lease) which the parties may not have reviewed. They may not be familiar with the terms of an ADLS lease and many people do not understand, nor have they taken advice on, the rights and obligations in the ADLS deed of lease.
It’s common in business leasing situations for a commercial real estate agent to negotiate all of the terms of the agreement to lease between the parties, prepare the document, have both parties sign and then deliver a copy to their respective lawyers with the intention of having them draw up the formal lease.
This approach has advantages and disadvantages.
On the positive side, most commercial landlords and tenants have a good understanding of their own businesses. They know what they need for premises and are usually comfortable with negotiating terms and conditions around annual rent, rights of renewal, fit outs and any further additional special terms or conditions.
However, the parties are often so keen to ensure that their commercial arrangements are recorded quickly before the deal cools off, that there are often some omissions. These can include:
- Whether or not a guarantor is available; this can have serious consequences from the perspective of enforcement or security for the landlord
- An understanding or explanation (for first-time landlords or tenants from their lawyers) about the obligations and rights of the standard ADLS lease to which the parties are bound, and
- An understanding as to when rent starts being paid; usually this is the ‘commencement date’ as defined in the agreement. However, particularly in the case of fit outs or construction of new premises, the premises may not be fully available for the use of the tenant on the actual commencement date, yet the obligation exists to pay rent.
These are just a few of the items that can be missed in the negotiations surrounding signing an agreement to lease.
This is a critically important document that landlords and tenants should have their lawyers review and advise on before the document is executed. Early advice in the process can prevent problems and disputes around easily preventable issues. As lawyers, we can also have valuable input into issues that the parties may not yet have considered.
If you are involved in negotiations around an agreement to lease be sure to contact us early in the piece so we can assist you with the negotiations.