Agreements for Lease and Leases in childcare property development.

Agreement For Lease.  What is it?

There are circumstances, when a premises is not yet ready for the tenant to move into however the parties (landlord and tenant) still wish to enter into an agreement for a future lease.

When this is the case, the parties must enter into what is known as an Agreement for Lease as they are unable to enter into a traditional Lease. This is because a traditional Lease requires possession be given to a Tenant on commencement.

An Agreement for Lease allows both the landlord and tenant to enter into a legally binding agreement that specifies the essential terms of the Lease prior to that Lease being granted (a copy of which is generally annexed to the Agreement for Lease). This allows both parties to have confidence that the Lease terms are already agreed upon when the premises are ready for the tenant to move into.

If you are a landlord undertaking substantial renovation or building work to a premise, an Agreement for Lease gives certainty that your investment will result in a benefit in rent when the Lease commences and the tenant moves in. Additionally, the tenant has confidence that when the premises is ready for occupation, they have the right to occupy it.

Agreements for Lease are commonly used in the following circumstances:

1. The landlord is yet to acquire the property and is waiting for settlement;
2. The premises are currently being constructed, renovated, developed or revamped;
3. Another tenant is currently in occupation and the new tenant wishes to secure the new lease while the current term is still running; or
4. Any other situation where the landlord cannot provide possession to the tenant immediately.

Consent is an important consideration

A common issue businesses face is obtaining the relevant consents from the Council or another regulatory body which allow them to operate their business.

The Agreement for Lease allows the parties to obtain these various consents and/or planning approval prior to the commencement of the Lease. This means that the tenant’s business can be fully operational when the lease begins.

Parties may also include clauses in the Agreement for Lease that allow them to terminate if they cannot obtain some or all permits/consents (after making their best endeavours to do so). These provisions reduce the risks to the tenant by ensuring that they are not bound to a Lease for a business premises in which they cannot operate their business due to consents being denied to them.

Fit Out Works

In some instances, the Agreement for Lease will have provisions that cover what construction or renovation work the landlord must complete by the commencement of the Lease. This allows the tenant to have a good understanding of precisely what the premises will look like on completion and the landlord’s installations. Tenants may also have fit out obligations that can be documented in the agreement. Fit out provisions give each party certainty on what their obligations are in relation to construction works, fixtures and fittings and the timeframe in which they must be completed, and which party is responsible for such costs. For example, a tenant will often be required to carry out their own works, at their cost, in relation to the landscaping or playscape of a childcare centre, including providing all necessary play equipment.

Sunset Date

An Agreement for Lease will generally include a sunset date clause within its terms. Typically, these terms allow either party to terminate the Agreement for Lease (which means they are not required to enter into the Lease) after a certain period of time has elapsed. These timeframes will depend on what consents each party must obtain, and the extent of the landlord and the tenants construction and fit out work. The advantage of this clause is that it allows either party to walk away if the entire project is detrimentally delayed or certain approvals cannot be obtained, and they wish to move.

Mock Case Study

• The ABC Company has recently purchased and settled on land in Melbourne.
• The ABC Company intends to construct a childcare centre on the land and lease it to a tenant.
• As the ABC Company will be building a purpose-built facility that cannot be used for any other purpose other than a childcare centre and will require the relevant planning approvals from Council for the use and development of the land as a childcare centre, and service approval for the number of childcare places from the Department of Education pursuant to the Childcare Laws (Education and Care Services National Law Act 2010), the ABC Company wants to ensure security of tenure for the premises prior to undertaking the development of the land.
• The ABC Company enters into an Agreement for Lease with XYZ Childcare Operator to clearly define the terms agreed between the parties and to ensure that XYZ Childcare Operator takes possession of the property once construction is completed and the necessary approvals and consents obtained.
• As XYZ Childcare Operator has negotiated with the ABC Company early on, the terms of the Agreement for Lease include a fit-out design that XYZ Childcare Operator have been involved in and the landlord has agreed to cover the costs of the fit-out as part of it’s construction.
• At the time of entering into the Agreement for Lease, the parties have also prepared a Lease which clearly defines the terms and conditions which will take effect upon commencement of the Lease (at the conclusion of the Agreement for Lease and once practical completion of the development is achieved).

Key Takeaways

An Agreement for Lease allows the landlord and tenant to prepare for the future in advance of the premises being ready for occupation. For this reason, it can have great utility. However, these documents can be quite complex, and therefore it is critical that you engage a property lawyer with the necessary skills and expertise to either prepare the Agreement for Lease or to advise you on these types of agreements.  In this way you avoid any property disputes or building disputes in the future.

The Property lawyers at Burke Lawyers have extensive experience with these types of arrangements, including in relation to childcare and healthcare property and property development.  Whether a Landlord or a Tenant, property developer or childcare operator we can assist you with any of your requirements. Please contact Kristy Muhlhan, Principal and Accredited Specialist property law on + 61 3 9822 8588. You you can email us HERE and we will be able to direct you to the best lawyer for your needs.