When renting commercial property, both landlords and tenants should understand their rights, responsibilities, and the agreement that governs their relationship. In most cases, a Commercial Lease sets out the terms of the tenancy.
A Commercial Lease gives a tenant the right to occupy a property and use the premises for an agreed purpose. Once the lease begins, the tenant generally has exclusive possession of the premises, meaning the landlord cannot enter or use the property without permission unless the lease allows it.
However, parties often need to complete certain steps before the tenant can move into the premises. In these circumstances, landlords and tenants may enter into an Agreement to Lease.
An Agreement to Lease outlines each party’s rights and obligations before the formal lease begins. It records the conditions that must be satisfied before the tenant takes possession and the lease term commences.
An Agreement to Lease can provide certainty for both parties. It allows landlords and tenants to plan ahead while they complete important requirements such as approvals, renovations, or fit-out works.
When Should You Use an Agreement to Lease?
A landlord and tenant may use an Agreement to Lease when certain matters must be completed before the tenant occupies the premises.
Common situations include:
- The tenant needs approval or consent to use the premises for a specific purpose;
- The landlord is constructing a purpose-built property for the tenant;
- An existing building requires renovations before occupation; or
- An existing tenant has not yet vacated the premises, which is common in shopping centres.
The parties can use the Agreement to Lease to set conditions that must occur before the lease begins. These conditions may include completing building works, obtaining approvals, finalising the fit-out, or providing vacant possession.
Benefits of an Agreement to Lease
An Agreement to Lease creates a binding commitment for both parties to enter into a Commercial Lease once the agreed conditions have been satisfied.
This provides certainty where either party must spend money before the lease starts.
For landlords, preparing commercial premises for a tenant can involve significant costs. Building works, renovations, approvals, and contractor management can take time and delay rental income. An Agreement to Lease allows landlords to manage these steps while securing a future tenant.
For tenants, completing necessary works before the lease begins can help them maximise the value of the premises from the first day of trading. It can also reduce disruption to customers once the business opens.
What Issues Does an Agreement to Lease Cover?
Consents and Approvals
Some businesses require approval before they can operate from a commercial premises. For example, a tenant may need Council approval to use a property as a café, medical office, or other specialised business.
Other approvals may also be required from a mortgagee, licensing authority, or another government body.
An Agreement to Lease can outline who is responsible for obtaining these approvals and the timeframe for completing them.
Fit-Out Works
A Works Schedule often forms part of an Agreement to Lease. It explains what fit-out works must occur and identifies whether the landlord or tenant must complete them.
The agreement may also include plans and specifications. These documents help avoid disputes by clearly setting out what each party expects.
In many cases, tenants are responsible for some or all fit-out works. However, landlords may provide design requirements, particularly in shopping centres or commercial buildings with specific standards.
If a tenant controls the design of the premises, they may need the landlord’s approval before completing works. The tenant may also need to provide plans and drawings for review.
Where the tenant completes the majority of the fit-out, the landlord may set a lease commencement date before all works finish. Tenants should organise contractors, designs, and approvals early to minimise the period where they pay rent before opening their business.
Timeframes and Completion Dates
An Agreement to Lease usually includes deadlines for completing conditions before the Commercial Lease starts.
Delays can occur with construction works, approvals, or other requirements. A clear and realistic timeframe helps both parties manage expectations.
Tenants should also consider including a “sunset date” in the Agreement to Lease. This allows the tenant to end the agreement if the landlord does not complete required works or obtain necessary approvals within the agreed timeframe.
Other Important Agreement to Lease Provisions
An Agreement to Lease will usually include a draft Commercial Lease so both parties understand the final lease terms before signing.
Before entering into an Agreement to Lease, both landlords and tenants should have the document reviewed by an experienced commercial property lawyer.
Important lease terms to review may include:
- Options to renew the lease;
- The lease commencement date and handover process;
- Any rent-free fit-out period;
- The amount of rent payable;
- Rent review methods, including CPI increases or fixed percentage increases;
- Outgoings and promotional costs;
- The permitted use of the premises;
- Insurance and guarantee requirements;
- Responsibility for building works and repairs;
- Make-good obligations when the tenant leaves; and
- Any attached documents such as works schedules, plans, specifications, or tenancy requirements.
Agreement to Lease vs Commercial Lease
| Agreement to Lease | Commercial Lease |
|---|---|
| Used before the tenant takes possession of the premises. | Creates the formal tenancy relationship once signed and commenced. |
| Sets out conditions that must be completed before the lease begins. | Sets out ongoing rights and obligations during the tenancy. |
| Commonly covers approvals, construction, and fit-out requirements. | Covers rent, outgoings, repairs, insurance, and permitted use. |
Conclusion: Understanding Agreements to Lease for Commercial Property
An Agreement to Lease can provide important protection and certainty for both landlords and tenants before a Commercial Lease begins.
By clearly setting out responsibilities, timeframes, approvals, and fit-out requirements, an Agreement to Lease can help prevent disputes and ensure both parties understand their obligations.
Because commercial leasing arrangements can involve significant financial commitments, landlords and tenants should obtain legal advice before signing an Agreement to Lease or Commercial Lease.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9818 2888 or email [email protected].