An agreement for lease (AFL) is quite simply an agreement between two parties to enter into a lease in the future. Unlike a lease, it does not create an immediate legal right to take possession of the land, however it does create enforceable rights between the parties.
When to use an AFL
An AFL can be vital when a landlord and potential tenant want to create a binding legal relationship for the leasing of property, but when a final lease cannot be entered into right away.
There are many reasons why a lease might not be able to be entered into immediately:
- the Landlord might not yet hold title to the premises;
- there might be a previous tenant still in occupation of the premises;
- third party approvals might be necessary before the premises can be occupied; and
- finally, and most importantly, the premises might require substantial repairs, renovation or fitout prior to the tenant taking occupation, often purpose built for the tenant.
Why an AFL is important
Where both a landlord and potential tenant are relying on a lease being entered into in the future, but have no legal agreement recording that, each is exposed to risk if the other should pull out. Particularly, in circumstances involving premises being refurbished or fitted out for the specific needs of a particular tenant, both parties are taking on a significant amount of risk. The landlord may be spending a substantial amount of money on the premises and could be left out of pocket if the tenant does not end up moving in. On the other hand, a tenant may be forced to pay extra if it needs to find alternative premises in a hurry because a prospective landlord does not complete the required fitout or rents it to someone else.
It is to mitigate these risks to both parties that it would be wise to enter into a formal AFL. An AFL provides clarity around important issues, such as time frames for completion of works and when the lease is to commence. An AFL also provides enforceable obligations on both parties in the event that the lease falls through, which can reduce the loss suffered.
What should an AFL cover?
An AFL needs to cover all the issues which may arise prior to a lease being entered into, as well as the form of the lease that will eventually be in place. Among the things that may need to be covered are:
- key dates and timeframes for any events precedent to entering into the lease;
- what works are to be carried out by the landlord or tenant;
- who is responsible for paying for any works and any financing or loan arrangements;
- obligations to obtain finance or development approvals by third parties;
- the terms under which the lease will be entered;
- lease incentives;
- guarantees and indemnities; and
- dispute resolution.
Due to the wide range of issues that need to be covered, AFLs can actually be larger and more complicated than the leases that arise out of them.