Generally, parties wishing to enter into a commercial lease arrangement usually negotiate terms first which are then recorded in a formal Agreement to Lease. This is because an oral agreement to lease will not be enforceable until a contract has been signed by both parties (and any guarantors). The Property Law Act 2007 (section 24) makes this clear.
An Agreement to Lease is useful as it allows the parties to establish the basic terms, such as duration of the lease and amount to be paid as rental, whilst also enabling the parties to defer confirming other terms which may require further negotiation (such as how rent reviews are to be conducted or the percentage to be charged for outgoings). Once all terms have been confirmed, the parties will then complete a full Deed of Lease for the premises.
So, what is the difference between an Agreement to Lease and a full Deed of Lease?
Agreement to Lease
As mentioned above, an Agreement to Lease is used by the parties to establish the basic terms of the lease. Such terms might include the number of car parks to be provided, address and description of the premises, monthly rental etcetera. The document can and should specify any other terms or conditions which the parties have agreed will require further negotiation and which will need to be recorded in the full Deed of Lease.
Deed of Lease
Once the landlord and tenant are satisfied with terms and conditions of the lease arrangement they will then sign and date a Deed of Lease which includes all the agreed terms as well as the provisions which detail the rights and obligations of both parties. For example, the tenant is required to maintain the premises and the landlord must provide the tenant with quiet enjoyment.
What happens if the Landlord and Tenant sign an Agreement to Lease but not a Deed of Lease?
We recommend that the landlord and tenant always complete a full Deed of Lease. This is to avoid possible complications and/or disagreements between the parties to an Agreement to Lease regarding the terms of the lease arrangement.
However, if the Agreement to Lease does not contain any conditions which require the parties to negotiate further or agree on other terms, then it is possible to avoid signing a Deed of Lease. Clause 4.3 of the Auckland District Law Society published form of Agreement to Lease, Fifth Edition 2012 (3) specifies the covenants and provisions of the current Auckland District Law Society published form of Deed of Lease will bind the landlord and tenant regardless of whether or not they have actually signed a full Deed of Lease.
My Agreement to Lease is unconditional, should I still insist on a Deed of Lease?
As discussed earlier, we recommend our commercial property clients always complete a full Deed of Lease. The reasons for this are:
- The Agreement to Lease refers to the Deed of Lease therefore you should have a copy for easy reference and for understanding the obligations and rights of both landlord and tenant;
- A Deed of Lease is required for any assignment of lease. It is not possible to assign an Agreement to Lease (see clause 6.1 of the Auckland District Law Society published form of Agreement to Lease);
- A Deed of Lease allows you to record matters which were subject to further negotiation or agreement in the Agreement to Lease. For example, the premises may have been being refurbished by the landlord after the Agreement to Lease was signed so a lease commencement date may have only been estimated.
An Agreement to Lease provides the parties with an opportunity to enter an initial lease arrangement with the ability to also negotiate further terms or make provision for other contingencies which can then be recorded later in a Deed of Lease. It is vitally important that both landlord and tenant obtain legal advice before signing any commercial lease agreement so that a proper assessment can be made as to the extent of the obligations either party may be assuming. Once the Agreement to Lease has been signed, both landlord and tenant are committed to the lease arrangement with limited options for exit.