What is an Agreement for Lease?
An Agreement for lease (AFL) is a legally binding document used to bind a landlord and a tenant into entering a lease on a future date.
Why should I enter into an AFL, instead of a lease?
An AFL would not usually be required where a landlord and tenant wish enter a lease straight away, for example, where the property is ready for occupation and use by the tenant.
However, an AFL can be essential in transactions where completion of the lease is dependent on (or needs to be delayed until) the occurrence of a certain event. Some examples include;
- Where a developer is looking to lease a property after its completion (commonly known as a ‘pre-let’);
- Where a tenant wishes to delay completion until the end of its existing lease, or until they have obtained planning permission for their desired use of the property; or
- Where consent is required from a third party to the letting.
An AFL gives the landlord the protection of having a tenant contractually ‘locked in’ to take a lease and offers the tenant flexibility on the date on which the lease is granted, in that the lease will only complete once a specific condition is met (i.e. once the property is completed, or once planning permission is obtained). This means that tenants are not paying rent for the period in which they cannot use the property, and the landlord has the comfort of knowing that the property will be let.
What to consider when entering an AFL?
This will largely depend on which condition needs to be satisfied before the lease is entered into and, as such, it is recommended that legal advice is obtained before you enter into an AFL.
When entering into an AFL for development purposes, there are some key terms that you may wish to consider at the outset of a transaction;-
- The Proposed Works – both parties need to be clear on what works are to be carried out before the lease completes. It is imperative that both the landlord and the tenant know what to expect (to avoid any dispute in the future).
- A longstop date – Delays are sometimes unavoidable and, often, unforeseen. It is important that the parties agree to a suitable longstop date, which is a date on which they may commence the procedure for terminating the AFL if the conditions contained therein have not been satisfied, to avoid both parties being ‘tied’ into the terms of the AFL indefinitely.
- Defects – a tenant taking a newly developed property will want some protections in place if the works carried out by the landlord are defective. Ideally, a tenant would want the benefit of collateral warranties and, as a minimum, they will want the landlord to be obliged to remedy any defect during the defect’s liability period (as set out in the AFL) or for the landlord to procure that their building contractor remedies such defects. You should establish whether guarantees or warranties are available for the proposed works.
- Rent and service charge – if not already determined, an AFL may include a mechanism for determining the rent and this is often linked to the final floor area of the property. Both parties will need to be aware of what may happen to the rent if the floor area is larger or smaller than originally thought.
- Early Access – the tenant may wish to have early access to the property to carry out their fit-out works and the parties should agree to how long this period is and what works the tenant can carry out during this time, bearing in mind that it is important not to inadvertently give the tenant a right of occupation before completion of the lease.
- Stamp Duty Land Tax (SDLT) – This is a tax charged on land transactions in England and whilst this note does not go into detail on SDLT, it is important to note that SDLT is payable upon ‘substantial performance’ of an AFL, which can occur when the tenant takes possession of the property or when any rental sums (or non-rental consideration) is paid. Tenants should bear this in mind as their SDLT liability may arise sooner than anticipated. There is also a risk that the tenant may pay the SDLT on substantial performance of the AFL, but the lease may not complete. In which case, the tenant would need to seek a refund from HRMC.
Lauren Philpot is an Associate Solicitor in the Commercial Property Team at Ellisons and has over 10 years’ experience in assisting both landlords and tenants with lease transactions. Please do not hesitate to contact Lauren on 01245 673162 if you have any questions relating to Agreements for Lease or any other Landlord and Tenant matter.
