What is the difference between an Offer to Lease, an Agreement to Lease and a Lease?

In short, an Offer to Lease, Agreement to Lease or Agreement for Lease are all pre-cursor documents to a Lease. They are used before a Lease is to be entered into and will contain varying degrees of detail based on the nature of the matter and the relevant parties’ requirements.

Regardless of the name of the document, it is the form and content of the document which is most important.

Offer to Lease

Typically, an Offer to Lease is a simple agreement regarding the terms which will be comprised in a new Lease between parties and may be either binding or non-binding in nature. An Offer to Lease should contain the commercial terms and any special conditions that parties wish to see reflected in their final agreed Lease. An Offer to Lease is mostly used to capture agreed terms such as rent, rent review methods, the duration of the lease and any other special conditions or incentives. An Offer to Lease should not be used in place of a formal Lease document as generally, it will not include the level of detail necessary for either party to rely on its terms.

What can be sometimes confusing is that an Offer to Lease can also be referred to as an Agreement for Lease, Agreement to Lease, Term Sheet or Letter of Offer, however, as stated, it is not the name of the document that counts, but the content itself.

Agreement to Lease

As leasing situations become more complex an Agreement to Lease (ATL) may be required or preferred. Unlike an Offer to Lease as described above, an ATL should be used when the parties have one or more specific pre-conditions which need to be satisfied before a Lease may commence.

For example, an ATL would be used when (among other things):

• the premises is not yet constructed;
• the tenant requires certain approvals in order to operate from the premises; or
• the landlord agrees to fit out the premises specifically for the use of a certain tenant prior to the tenant commencing occupation.

The ATL will detail the necessary pre-conditions which must be satisfied before a tenant can be granted exclusive rights to possession of the premises, and only once these conditions are satisfied will the Lease commence.

An ATL is mutually beneficial to both landlord and tenant, as it allows the parties to agree on what will happen in the future, provided the necessary conditions are satisfied. However, if for various reasons the conditions cannot be met, the parties can go their separate ways.

The ATL will usually attach a Lease which is agreed at the same time as the ATL is negotiated and executed so that the parties are clear on the Lease terms that will bind them once the conditions of the ATL are satisfied.

Lease

The Lease is the final piece of the puzzle and will detail the rights and obligations of both parties, as landlord and tenant. Subject to certain exclusionary circumstances, the Lease will be governed by the Retail and Commercial Leases Act 1995. The Lease will contain the details such as rent, duration, area of occupancy, maintenance obligations and termination rights.

Documents in Practice

To summarise the above using a practical example, the leasing process for a new childcare centre may be as follows:

Offer to Lease

Agent and parties negotiate an Offer to Lease which sets out the intent of both parties with respect to the construction, development and long-term leasing of a childcare centre, specifically:

• the landlord intends to purchase the land and construct a childcare centre using the construction and design requirements of the tenant (a national childcare operator); and
• once constructed, the rent will be X and the duration of the lease will be Y.

Agreement to Lease

A solicitor will prepare an ATL which reflects the terms of the Offer to Lease, including the specific pre-conditions (or milestones) which must be satisfied such as:

• the landlord will settle on the acquisition of the land within 3 months;
• the landlord and tenant will agree on the specific details of the design and construction plans within 9 months;
• the landlord will obtain development approval for the construction of a childcare centre within 12 months;
• the landlord will commence construction within 18 months;
• the tenant will obtain approval to operate a childcare centre from the property; and
• the landlord will reach practical completion of the construction of the childcare centre within 24 months.

The ATL will also state that once the pre-conditions of the ATL are satisfied, the Lease will be binding. In the event the conditions cannot be satisfied, the parties may not proceed and the legal relationship comes to an end before a Lease commences.

Lease

The Lease will be prepared at the same time as the ATL and will be annexed to the ATL. The Lease will ‘automatically’ come into effect and become binding once the terms of the ATL are satisfied.

Timeframes

One of the most important aspects to consider when deciding whether an Offer to Lease, ATL or simply a Lease is required will be the timeframes of the process. As detailed above, an Offer to Lease can be used when the agreement is simple and timeframes are short. Conversely, as timeframes expand and the obligations of the parties become complex an ATL would be preferrable (necessary and advisable).

Summary

Whilst it can be tempting to proceed directly to a Lease, this is not always possible depending on the circumstances. It is important, regardless of whether you are a tenant or landlord, that you consider or seek advice to ensure that the correct type of documentation is being implemented – not just based on the name of the document but, more importantly, considering the form and content.

Eckermann Lawyers regularly advises both landlords and tenants with respect to leasing matters and are experts when it comes to preparing and negotiating both simple and complex lease documents (no matter what they might be called).