What if I want to Secure a Lease Before the Property is Built?
Choosing the right location can make or break your business; but securing the right position can be a challenge. An increasingly popular solution is an agreement for lease. This type of agreement is made between a landlord and a tenant, and it outlines the terms and conditions of the lease before the property is even constructed.
What is an Agreement for Lease?
An agreement for lease is an agreement between a tenant and a landlord, established before a commercial property is constructed. This agreement can be beneficial for tenants to secure a preferred location and have input into the design of the premises.
At the start of this process, both parties agree on the terms and conditions, which typically include:
Commencement date.
Term of the lease.
Sunset clause - the agreement will end if the premises isn’t ready by a specific date.
Rent amount.
Review mechanism — how the rent amount is evaluated and potentially adjusted throughout the lease term.
Any incentives offered by the landlord.
Property specifications and standards.
Fit-out obligations and any contributions by the tenant.
Termination rights and remedies due to breach or default.
Consider this example: Emily owns a clothing boutique and hears about a highly anticipated shopping precinct being developed in the city centre. Keen to secure a prime location, she reaches out to the developers and expresses interest in leasing a store.
This early commitment allows her to negotiate the lease terms with the landlord well before construction is complete.
Pros of an Agreement for Lease for Tenants
Input on fit-out and customisation
In some cases, committing to a lease before the property is built allows tenants to contribute to the property's design and fit-out. This means the space fits the practical needs of your business and aesthetic preferences.
Potential to negotiate rent and lease terms
Landlords can be more open to negotiations if you commit to a lease before the building is completed. This early commitment can bolster the financial security of their investment in the building. In return, you could lock in a lower rent rate or more beneficial lease terms.
Get the location you want
An agreement for lease allows you to secure your preferred position early. This is particularly beneficial if the property is in a prime location or the build is highly anticipated, like a new shopping centre. It can ensure your brand's visibility in a strategic, high-traffic area.
Cons of an Agreement for Lease for Tenants
Construction delays or defects: If construction is delayed or there are defects in the finished space, it can postpone your move-in date or affect the functionality of the finished store.
Changes in market conditions: You could pay above the market rate if the market fluctuates significantly between signing the lease and moving in.
Disputes over property specifications: You could find yourself in a disagreement with the landlord regarding the property's fit-out and features. These disputes could come from miscommunications, changes in circumstances, or differing interpretations of the lease terms. This is why a comprehensive agreement clearly stating your expectations is necessary.
How Much Influence Can a Tenant Have in the Construction Process?
How much influence a tenant can have in construction usually depends on the stage of development at which they enter into a lease agreement.
The earlier you commit to a lease, the more opportunity you have to contribute input into the building's design, layout, or environmental features. This is a significant advantage of an agreement for lease, as it allows a business to shape the future space to ideally suit their operational and aesthetic needs.
Once the lease is signed and construction begins, the scope for the tenant to influence the design usually decreases. So, having clear plans and starting negotiations with developers early matters. In some cases, this could be up to three years in advance. It's also wise to get independent representation to ensure your interests are effectively communicated and defended.
Checklist for Signing an Agreement for Lease
Developer's Reputation: Begin your due diligence by thoroughly investigating the developer's credibility. Review their past projects to gauge their reliability in delivering on time and meeting industry standards.
Future Market Conditions: Predicting the market may seem like looking into a crystal ball, but do your best to make an educated guess. Reflect on the possible state of the economy and its potential influence on the property market.
The financial stability of your business: Can you realistically commit to a lease that will only commence in the future without putting pressure on your finances?
Location: Will the area attract your target customers or clients? Will there be ample parking and accessible public transportation?
Property Design: Will the proposed design and specifications of the building meet your needs? Do you have the opportunity to provide input?
Lease Terms: Carefully review the proposed lease terms to make sure they meet your business needs. This includes rent amount, review mechanism, and termination rights.
Fit-out Obligations: Understand your responsibilities in terms of fit-out. What will be the cost, and who will manage the project?
Incentives: Consider if any incentives the landlord offers benefit your business long-term.
Exit Strategy: Can you sublease or transfer the lease to a new tenant if your circumstances change?
Legal Advice: Always get legal advice before signing any commercial lease. A lawyer can help you understand the terms and negotiate any necessary changes.
This checklist is only a guide, and every business's needs differ. Always conduct thorough research and get legal advice before signing an agreement for lease.
At Bradley & Bray, we provide advice on commercial and industrial leasing so you are fully aware of what you are committing to. With an experienced Commercial lawyer preparing or reviewing your commercial lease contract, you will be well-equipped to negotiate the best deal when it comes to your lease. Contact us today.
This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers takes no responsibility for any use of the information provided in this article.
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