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If you’re a prospective tenant or landlord entering into a commercial leasing transaction, 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 with each other. This knowledge will help you make an informed decision before you sign a commercial lease.
Let’s look at each document to see what they mean.
The first document you’re likely to sign is an Offer to Lease.
Offer to Lease is normally prepared by a property agent and sets out key terms that will form the foundation of the Lease Agreement.
These terms usually include the property address and size, current 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 parties sign the Offer to Lease, the tenant will usually pay a deposit and the landlord will instruct its solicitors to proceed with preparing the formal Lease Agreement.
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 Lease Agreement may be binding and give the landlord the right to keep the deposit if the tenant has a change of mind and perhaps further recourse against the tenant.
The Lease Agreement 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 starts, a copy is normally lodged with the Land Titles Office to be registered on the property’s Title.
The length of the Lease Agreement will determine whether registration is required. In a straightforward leasing transaction, the Lease Agreement will usually be the final document signed.
In some situations, the parties will be required to sign an Agreement For Lease at the same time as signing the Lease Agreement.
An Agreement For Lease will usually be applicable if there will be a delay between the signing of the Lease Agreement and the start of the tenant’s occupation of the property. A typical example is when the property is still under construction.
Let’s say as a tenant, you might want to lease a shop in a shopping centre which is currently under construction. Because construction is not complete, the documents such as the plans for the shop and the centre have not yet been lodged and registered with the Land Titles Registry to create a legal title to the shop.
By signing the Agreement For Lease, the parties sign a binding agreement with the intent to enter into a Lease once the shop has been finished and title to the property created.
Once formal title is created, then the landlord will include the property description into the signed Lease Agreement. The Agreement For Lease will usually set out a number of considerations such as:
- Plans and Specifications. Drafts of these will normally be set out along with the landlord’s ability to modify them.
- 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.
- 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.
- 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 and it’s terminated, then a legally binding Lease will not come into effect. The landlord is then usually free to lease the property to another tenant.
If the landlord is providing the tenant a fitout contribution, rent-free period or some other form of incentive to enter into the Lease Agreement, then the details may be included within an Incentive Deed.
Even though such incentives can be contained in the Lease Agreement 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 Agreement 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 advisers.
If the Lease is a retail Lease (different to a commercial 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 important to ensure the details in these statements are correct. In certain cases the tenant could have the ability to terminate the Lease Agreement 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.
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.
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Matthew is the founder of Rouse Lawyers. He leads the firm's Corporate & Commercial team. Before he started Rouse Lawyers, Matthew developed his expertise as a commercial lawyer with some of Australia's largest law firms. He focuses on mergers and acquisitions, intellectual property and franchising.
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