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When a commercial landlord and new tenant intend to enter a commercial lease together, they will negotiate and draw up a lease agreement. This contains the obligations and rights of both parties concerning the commercial lease. Usually, a tenant’s professional representative will draft this, but they must first make enquiries. The commercial lease is not legally binding until the commercial lease agreement is complete and signed.
However, as the tenant has started work towards the potential commercial lease, they may be keen to ensure they have an exclusive right that the landlord will grant the lease to them. They may, therefore, enter into an exclusivity agreement. This article will explain the merits of an exclusivity agreement when granting a commercial lease in the UK.
What is an Exclusivity Agreement?
A commercial tenant and landlord may draw up an exclusivity agreement when a commercial landlord is considering granting a lease to a commercial tenant. You may also hear people refer to it as a ‘lock-out agreement’. It is an agreement between the landlord and tenant that the landlord, for a specific ‘exclusivity period’, will not negotiate with other business owners who may wish to lease the commercial property.
A commercial landlord and commercial tenant may decide to create an exclusivity agreement where they both have genuine intentions to enter the commercial lease. They will enter into this while enquiries take place to draw up the commercial lease. Both parties enter into the lease agreement with good faith.
Why Use an Exclusivity Agreement?
There are important reasons why a commercial landlord and commercial tenant may wish to enter into an exclusivity agreement when granting a commercial lease in the UK.
When parties negotiate and draw up a commercial lease, the tenant’s professional representative, such as their conveyancer, will inquire into the commercial property. This may be necessary so the tenant can understand the details of the commercial premises they intend to occupy. Answers to these may affect the lease terms and potentially the decision to proceed.
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The Agreement
An exclusivity agreement is a separate agreement from the commercial lease agreement which the two parties intend to sign. It will state the purpose of the deal and list, for example, the following:
- the landlord’s obligations during the exclusivity period;
- the tenant’s obligations during the exclusivity period;
- termination rules, which usually state that either party may immediately terminate the agreement in writing but that the landlord only can if the tenant breaches their obligations in the contracts; and
- remedies if the landlord breaches the agreement and, as a result, the tenant terminates it, which usually means they will pay the tenant the costs they incur.
In an exclusivity agreement, you may see the phrase ‘time of the essence’. This is because time is crucial by the very nature of this type of agreement.
Landlord’s Obligations
A commercial landlord will have various obligations in an exclusivity agreement to fulfil its purpose. They must promise to pass transaction documents to the tenant’s conveyancer by a specific date. They must also ensure they pass these in the recorded format, such as by first-class post.
This cheat sheet outlines what you should be aware of in your lease agreement.
The commercial landlord will also have to ensure they answer specific queries the tenant may raise promptly and provide the tenant’s conveyancer with all they need to draft and negotiate a commercial lease.
The significant obligations of a commercial landlord in an exclusivity agreement are to ensure the following:
- that they do not give the documents concerning the commercial lease to anyone apart from the tenant and surveyor;
- that they do not grant the lease to anyone else;
- that they do not create issues with the title to the property, which is the legal ownership, which may stop the parties from entering the lease; and
- do not enter into any discussions or actions to sell the property.
Tenant’s Obligations
A commercial tenant’s obligations in an exclusivity agreement are more straightforward and less demanding than the commercial landlord’s. They agree to the following:
- to instruct their conveyancer to investigate the title to the property, which may not nearly be the commercial landlord;
- make necessary enquiries into the property; and
- negotiate and draft the lease agreement.
Key Takeaways
When a commercial tenant wishes to enter a commercial lease and the commercial landlord intends to grant them the lease, they may enter an exclusivity agreement. This stops the commercial landlord from negotiating a commercial lease for the property with another tenant for a particular period.
This allows a commercial tenant to instruct their conveyancer to conduct the necessary lease enquiries and draw up the lease agreement. They can do so with an element of security that the landlord will grant them the lease. An exclusivity agreement will detail the obligations of the landlord and tenant and describe termination rights and remedies for the tenant.
If you need help drafting an exclusivity agreement when granting a commercial lease, LegalVision’s experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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