Three Key Points to Know About an Agreement for Lease

A lease agreement is a legally binding contract between a commercial landlord and tenant. This grants a tenant sole occupation of the landlord’s commercial property. A tenant will pay their landlord rent in return, and they will both agree on a lease term. However, there may be instances where prior to entering a commercial lease, the parties will enter an agreement for lease. If this applies to you or you are considering one, there are various points to understand. This article will explain three key points about an agreement for lease in the UK.

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Agreement for Lease 

An agreement for lease is a legal document that relates to commercial leases. A property owner and business owner may agree to an agreement for lease before entering a commercial lease. The agreement for lease binds the two parties to enter into a commercial lease agreement in the near future. This can be:

• on a specific date; or
• after particular conditions are complete.

An agreement for lease can be used when it is not possible to sign a commercial lease agreement or when the parties prefer not to do so yet. As it is a legally binding contract, it is always vital to ensure that a commercial lease agreement is satisfactory for both the landlord and tenant.

Key Points 

Property and business owners should note some critical points about an agreement for lease. We list three of these below.

1. Is it Binding?

It is in both parties’ interest that a lease contract is binding. Where it is, and a party fails to later enter a commercial lease, they then must cover the losses the other party incurs. This is because they will be in breach of contract.

For the agreement to be a legal contract, it needs to satisfy the following four points:

1. the agreement must contain an offer and acceptance. This means that the property owner, who will be the commercial landlord, offers a lease in it and the business owner as a potential tenant accepts it;
2. there is a clear intention between the two parties to enter into a legally binding contract;
3. the parties have the capacity to enter into an illegally binding agreement; and
4. the agreement for lease contains consideration. This means it must include something the business owner will give to the property owner for the lease. This will usually be money in the form of rent.

2. Does the Agreement for Lease Incur Tax?

Whether an agreement for lease incurs tax is crucial to know about these types of contracts. An agreement for lease may incur either:

• stamp duty land tax (SDLT) for land transactions in England; or
• land transaction tax (LTT) for land transactions in Wales. 

Your agreement for lease may incur one of the above if it lasts for a long enough time and the rent paid by the business owner surpasses a specific threshold If your rental amount passes a certain amount, a premium at lease completion could also apply.

If an agreement for lease does incur one of the two tax forms listed above, it will either be due on:

• completion; or 
• when the lease is ‘substantially performed’ if this is before completion of the lease.

3. Is it an Unprotected Lease?

If the commercial lease you enter is a non-protected lease, there is an additional key point you should consider. An unprotected lease is a commercial lease that does not have security of tenure. 

To opt out of the provisions in the Landlord and Tenant Act 1954, a commercial landlord and tenant must carry out a specific legal process. When you plan an agreement for a lease, this process must be completed before both parties enter the deal for the lease.  

Key Takeaways

If you are a business owner and want to enter into a commercial lease, you may consider first entering an agreement for lease. This legal document binds both parties to enter a lease agreement in the near future. If you decide to enter an agreement for a lease contract first, the agreement for lease must be binding. You may also owe tax in certain circumstances. Additionally, where the commercial lease is unprotected, you can follow a legal process. 

If you need help understanding key points you should know about an agreement for lease in the UK, our 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.