The first part of this series looked at when it was appropriate to use an agreement for lease. This part discusses two of the more common conditions which must be satisfied before the lease is completed. These are:
• the prospective landlord (“L”) needs consent of third parties to the proposed letting; and
• L has to build the premises or carry out specified works to make existing premises suitable for the prospective tenant (“T”).
There are other types of condition, such as L having to gain vacant possession from an existing tenant, or resolve a title defect. Sometimes the whole agreement for lease is conditional on L (or T) getting planning consent for the works that they want done.
When drafting any condition it is crucial to address all of the issues set out in Box A, to avoid any ambiguity over when and if the parties can terminate the agreement for lease, enabling L to seek a new tenant and T to sign up for alternative premises. Neither party wants to find itself locked in for ages to an arrangement that is not progressing in the right direction.
Consent of third parties
It is very common for L to need the consent of its lender, or the superior landlord, to a proposed letting and/or T’s planned fitting out works. Less commonly, L might need the consent of a neighbour (perhaps where there is a shared access way or rights of light issue to resolve). It would be foolish for L to embark on the expense of seeking consent if T was still free to go elsewhere in the meanwhile.
So L will tie T into an agreement for lease where the lease is granted only once the consents come through. T should look for a robust promise from L (at very least to use reasonable endeavours) both to submit a full application for consent promptly and to pursue it diligently, otherwise the process will stagnate. T will also want L to covenant to comply with the reasonable requirements of the third party in relation to the consent. This might simply involve supplying financial pedigree details for T or giving an undertaking to pay legal costs. It might mean serving up copy plans for proposed works. If well advised, L will know that much of that essential information will come from T, so will require T to covenant to co-operate in the process, to supply the documents that are requested reasonably by the third party, and to execute any licence issued to record the terms of the consent.
It is important that both parties consider whether they will accept only a formal written consent as satisfying the condition. Aubergine Enterprises Ltd v Lakewood International Ltd [2002] EWCA Civ 177 decided that a consent given in subject-to-contract correspondence would suffice. If either party wants to avoid premature suggestion of consent being given, the agreement for lease should specify that only consent by way of a completed licence document will suffice. The Court of Appeal upheld this approach in January 2012 in Rail Safety and Standards Board Ltd v British Telecommunications Ltd [2012] EWCA Civ 553.
Landlord’s works to be completed first
The extent of L’s works can vary enormously. For a new development, L will promise to build the premises from scratch. For an existing building, L may simply be painting, installing partitioning or replacing plant or fittings. It is vital (from T’s perspective) that the agreement for lease describes accurately what works must be completed (often using an appended specification and plans). It ought also to describe the quality of installation that is expected (perhaps obliging L to carry out the works in a good and workmanlike manner, or to a standard suitable for a high-class office building, though there will be room for argument about both).
Permitted changes
One cause for major disagreement is L’s freedom to depart from the specification. This will matter far more in a project that has been designed specially for T than where the works being done are more mundane. L needs leeway to substitute equivalent materials (to save time delays in completing the works). Seeking T’s consent to every change would be unworkable but T has signed up to a lease of premises of a particular intended shape, size and quality of fit out. T has agreed to pay a price which reflects that. If L builds substandard premises, or makes them too large or too small, T may be overpaying, or not getting the space it intended and will probably want the right to walk away.
The solution to this tension is to give L freedom to make changes and substitutions within a limited range without consent; for T’s consent to be obtained before more wide-ranging changes are implemented (not to be unreasonably withheld); and for T to have an absolute veto over a shortlist of crucial features. Where the eventual starting rent for a new building is geared to a rate per sq ft of built space, the agreement for lease should set permitted tolerances for the premises as built. It ought also to say what happens if those tolerances are exceeded (either too large or too small). Will T still be obliged to take the premises, but at the lower or higher rent dictated by their size? Or should T be able to terminate the agreement for lease?
Setting target dates
There will always be legitimate excuses for work to be delayed (strikes, bad weather, supplier insolvency). In other situations L should not be allowed to take advantage of its own default (not ordering materials sufficiently early, not having enough staff to do the job, not briefing subcontractors properly). T will not be willing to be kept waiting forever, no matter how genuine L’s excuse may be. The way to draft this is to have a target date for completion of L’s works, a guaranteed extension of time for this date in certain circumstances (the legitimate excuses), and a drop dead date with no capacity for extension. If the works are not completed by the drop dead date, then, regardless of cause, T can terminate the agreement for lease.
When is work “complete”?
It is important to understand the difference between practical completion of the works (which is usually the trigger event) and actual completion of the works (which may well be some time later).
Practical completion is a term of art borrowed from the construction industry. Under a building contract, practical completion can be achieved even though there is a long list of items not yet done, or done so badly that they need correction (this is called a “snagging list”) by the contractor. Perversely, practical completion rarely includes the actual commissioning of plant and machinery. Normally L will want the lease to be triggered by the achievement of practical completion under the building contract so it cannot be caught out having to pay the contractor in full but without a T firmly committed.
On the other hand, T may rightly think that a long snagging list means the premises are nowhere near ready for it to move into and start fitting out works, let alone start paying rent. Where T has a strong bargaining position, it can insist that L defines completion (which triggers grant of the lease) in a different way. For example, the process might require joint inspection of L’s works (by L’s architect and T’s representative) so that T can point out unacceptable defects to be put right before the lease grant is triggered.
Either way, the agreement for lease should define an appropriate regime for correcting defects. T may oblige L to do this within a given time, or to T’s reasonable satisfaction. The clause should make it clear what T can do if this obligation is not satisfied. Can T walk away, or is it left with its remedy in damages and to correct the defects itself?
Why this matters
Agreements for lease are often used where there is something still to be done before the actual lease can be granted. It is important to draft clearly the events which will trigger completion of the lease and the consequences if those events do not occur. Otherwise both parties may be left in limbo, with only expensive litigation as an exit strategy.
The same principles apply, whatever the nature of the trigger event. The clause should identify precisely what is to be done, by when, whether there is capacity for extension of time and by how much, and the consequences if the trigger is not satisfied by the deadline. If the prospective tenant is to have the choice of terminating the agreement for lease and walking away, then the prospective landlord will want more flexibility about how to satisfy the trigger event.
The agreement for lease should also indicate how much effort the tenant must invest in helping to satisfy the trigger event. For example, where the grant of the lease is conditional on obtaining the consent of a superior landlord, the tenant should agree to supply any reasonable information requested by that superior landlord. Otherwise the tenant could sit back, refuse to co-operate and allow the agreement for lease to founder.
Where the trigger event is less contentious, it may be legitimate to take a risk and not set out in the agreement for lease all the alternatives which will apply if that event is severely delayed or never happens. This makes it quicker to get to signature of the agreement for lease, but the parties may pay the price later on, when the prospective tenant refuses to execute the lease because it alleges there is still an outstanding condition, but the landlord does not know whether it can cut its losses, terminate and seek a different tenant.
Where the premises to be demised by the lease have yet to be built (this type of agreement for lease is called a “prelet”) there are special points to be borne in mind. The standard definition of practical completion under the building contract may not be a suitable benchmark for whether the works have been completed sufficiently to trigger grant of the lease. Tenants with a strong bargaining position may be able to dictate who will decide whether the requisite standard of completion has been reached.
The watchwords when drafting are “think ahead and plan for the unintended or the unexpected”.
Key issues to address when drafting a condition
• The target that must be achieved
• The date by when this must be done
• Which party is to take the necessary action and whether the other party is to co-operate
• How much effort must be applied to satisfying the condition (best or reasonable endeavours, or less than that)
• Whether extension of time to achieve the target is ever legitimate. If so, what excuses will justify extension and when is further extension impossible (known as the drop dead date)
• The consequences of failure to achieve target.
Sue Highmore is an editor with Practical Law Property and a freelance writer
