In many commercial property transactions, parties are keen to complete a lease as quickly as possible. However, there are often circumstances where the lease cannot be granted immediately because certain steps must first be taken by one or both parties. In those situations, an agreement for lease (“AFL“) may be appropriate.
An AFL is a legally binding contract under which the landlord agrees to grant, and the tenant agrees to take, a lease at a future date once specified conditions have been satisfied. The lease will usually be agreed at the same time as the AFL (and attached to it) so it is ready to go when the conditions are met. In effect, it enables the parties to become contractually committed, while postponing the grant of the lease until the property is ready.
Although every transaction is different, there are three common situations in which an AFL may be required.
A common reason for entering into an AFL is where works need to be carried out before the tenant can occupy. For example, the property may need to be constructed, redeveloped or refurbished.
In these circumstances, the landlord will often want certainty before starting and paying for the works that the tenant is committed to taking the lease once the works have been completed. Equally, the tenant will want comfort that the property will be delivered in accordance with an agreed specification and within an agreed timeframe.
A well-drafted AFL should set out how completion of the works will be certified, when practical completion is deemed to have occurred and if the tenant may terminate the AFL if the works are not completed by an agreed longstop date.
An AFL can also be used where planning permission is required. This may be because planning permission is needed for the tenant’s proposed use of the property or because the property is listed and listed building consent is required for the tenant’s fit-out works. A tenant is unlikely to want to spend time and money obtaining planning permission without certainty that it will be able to take the lease if consent is obtained.
The AFL should make clear what will constitute a satisfactory planning permission and identify any planning conditions that will be treated as so onerous or unacceptable that their inclusion will mean a party is not required to proceed with the lease.
Sometimes the property is ready to be occupied but there are other reasons why the lease cannot be granted immediately. This could include the need to obtain third-party consents, such as consent from a superior landlord or lender, or for an existing occupier to vacate the property.
An AFL allows the parties to commit to the lease while those matters are resolved.
So in summary, an AFL is often useful where the parties are ready to commit to a transaction, but the lease itself cannot be granted yet. It provides a clear framework for bringing the transaction to completion once the relevant conditions have been satisfied. For landlords, it can secure an occupier and support funding arrangements. For tenants, it can preserve the opportunity for space and help ensure that premises will be available once any outstanding requirements have been satisfied.
We recommend that legal advice is sought before entering into any AFL. Please contact a member of our team if we can support your business.
