April 18, 2017

Contracts in a leasing transaction

Leasing Transactions

If you’re a prospective tenant or landlord entering into a leasing transaction then it’s likely that you will be asked to sign a number of different documents. It’s important to understand the differences between each document and how they interact in order to determine which is appropriate for your situation.

  1. Offer To Lease

The first document you’ll commonly be asked to sign is an Offer To Lease. This document is normally prepared by a property agent and sets out a few pages of key terms that will form the foundation of the Lease. These terms usually include the property address and size, rent and annual increases, proportion of outgoings, security bond, whether there will be personal guarantees and any sort of incentive or special conditions. Once the Offer To Lease is signed by the parties, the tenant will usually pay a deposit and the landlord will instruct its solicitors to proceed with preparing the formal Lease.

Whether the Offer To Lease is binding will depend on its terms. The document may expressly say that it is not binding, in which case either party can pull out of the negotiations and the deposit will be refunded. In some cases the document may be binding and entitle the landlord to keep the deposit if the tenant has a change of mind, and perhaps further recourse against the tenant.

  1. Lease

The Lease is the formal document containing all of the agreed terms and conditions for the transaction. It will become binding once it is signed by both parties. Once the Lease commences, a copy is normally lodged with the Land Titles Office to be registered on the property’s Title. The length of the Lease will determine whether registration is required. In a straightforward leasing transaction, the Lease will usually be the final document to be signed.

  1. Agreement For Lease

In some situations, the parties will be required to sign an Agreement For Lease at the same time as signing the Lease. An Agreement For Lease will usually be applicable if there will be a lengthy delay between signing the Lease and the tenant’s occupation of the property commencing, such as when the property is still under construction.

For example, the tenant wishes to lease a shop in a shopping centre which is currently under construction. Because construction is not complete, then the appropriate documents such as the plans for the shop and the centre have not yet been lodged and registered with the Land Titles Registry in order to create legal title to the shop.

By signing the Agreement For Lease, the parties are entering into a validly binding agreement to essentially enter into a Lease once the shop has been constructed and title to the property is created. Once formal title is created, then the landlord will insert the property description into the signed Lease. The Agreement For Lease will usually set out a number of considerations such as:

  1. Plans and specifications. Drafts of these will normally be set out along with the landlord’s ability to modify them.
  1. Preconditions for construction. The construction would normally be subject to a variety of preconditions such as council approval. If a precondition is not met, then the landlord may have the ability to terminate the Agreement and walk away from the transaction without any claim by the tenant.
  1. Timeframes. There will normally be a construction deadline, and if construction is not complete in time, then the parties may have the ability to terminate the Agreement.
  1. Fitout requirements or contributions. The Agreement For Lease may state whether the landlord or tenant will be responsible for fitting out the shop, along with fitout specifications and who will own the fitout. The landlord may also be providing a fitout contribution to the tenant.

If a condition of the Agreement For Lease is not fulfilled which leads to its termination, then a legally binding Lease will not come into effect. The landlord is then usually free to lease the property to another tenant.

4. Incentive Deed

If the landlord is providing the tenant a fitout contribution, rent-free period or some other form of incentive to enter into the Lease, then the details may be included within an Incentive Deed. Whilst such incentives can be contained in the Lease or an Agreement For Lease, in some situations a separate Incentive Deed may be appropriate. The main reason for this is normally to maintain confidentiality.

Because a Lease is registered with the Land Titles Office, anyone can carry out a search and obtain a copy of the Lease (for a fee). The landlord may have special arrangements with different tenants and not want other tenants to know about the incentive. An Incentive Deed will not form part of the public record and will often have a confidentiality provision preventing the tenant from disclosing the incentive details to anyone other than the tenant’s legal or financial advisors.

  1. Disclosure Statements

If the Lease is a retail Lease, then there will be mandatory disclosure statements to be signed by both the landlord and tenant, as well as the tenant’s legal and financial advisers. It’s vital to ensure the details in these statements are correct. In certain cases the tenant could have the ability to terminate the Lease early, or the tenant may not be released from the terms of the Lease if they were to assign the Lease to a new tenant.

Conclusion

You may find yourself in a situation where you are presented with a combination, or all, of these documents. Always remember that in many cases these documents are legally binding and have serious consequences for non-compliance. It’s always better to err on the side of caution and obtain advice from an experienced leasing lawyer before signing on the dotted line, especially before signing an Offer To Lease.

Need further information about retail shop leases or other aspects of commercial law in Australia? Contact the experts at Rouse Lawyers today.