Agreements for lease: what to look out for - heads of agreement and more

Following on from our introduction to the Agreement for Lease (AFL), there are a number of matters that prospective landlords and tenants need to watch out for when negotiating an AFL. We provide the following tips so that you can know your rights and the associated risks, to ensure your agreements reflect your interests.

How do I protect my interests while negotiating an AFL and Lease?

As we have noted, an AFL is often more complicated that the eventual Lease, and negotiations for both these documents can last upwards of several months, depending on the complexities. An option that parties often turn to is entering into a shorter, less formal document setting out their agreement in brief terms. This is often referred to as a Heads of Agreement (HOA).

Is a HOA always binding?

A distinct advantage of an AFL is that it is enforceable, including by way of specific performance. A party disadvantaged by a non-complying party can seek relief by way of Court orders that the other party perform their side of the bargain. However, does a HOA give rise to the same level of protection?

This depends. The Court will seek to uphold the bargain reached by the parties, so the first issue it faces is to work out what the parties actually intended. The options for parties when negotiating an AFL are to enter into a HOA that will:

  1. set out the terms of the preliminary agreement, without any intention to be bound unless and until an AFL is signed;
  1. set out agreed terms, with performance conditional upon entry into a formal agreement;
  1. set out agreed terms, with the intention to be bound to continue negotiations to see if a final agreement can be reached;
  1. set out agreed terms with the intention of entering into a binding agreement encompassing those specified terms and such other terms as may be subsequently agreed; or
  1. agree certain terms and to enter into an AFL and Lease containing those terms, with the intention that the parties are immediately bound to do so.

What is required to be agreed for a binding HOA or AFL?

Ideally, your AFL will contain a greater amount of detail than a HOA; however, both documents may be enforceable provided agreement is reached on the following fundamental criteria:

  1. Parties – who are the parties to the agreement?
  1. Premises – what land is the subject of the agreement?
  1. Period – how long is the term of the lease?
  1. Price – what is the rent?

Beyond the “four P’s” above, a Court may imply standard terms required to make an AFL and Lease, particularly if there is evidence as to the parties’ intentions (for example, a reference to entry into a landlord’s standard leasing documents). In this case, a detailed HOA may contain enough agreed terms to operate as an AFL.

If the four Ps are not agreed, there is insufficient certainty for a HOA or AFL to be enforced.

What to look out for

Consider your needs carefully. Is the property/tenant a rare opportunity, such that you are willing to enter into an immediately binding agreement, notwithstanding the fact that your negotiations are not finalised? In circumstances where parties agree to be immediately bound, a Court will enforce that agreement by determining (where possible) additional terms required for performance.

Alternatively, you may wish to secure the property for a period of time, without yet locking yourself into an AFL and a binding commitment to enter into a lease. In this case, you have the option of agreeing to continue negotiations in an exclusive dealing period, without a binding obligation to enter into an AFL.

There are risks regardless of whether or not you choose to be bound at this preliminary stage. If you are unsure as to the most suitable option for you, we recommend that you seek advice. In all respects, remember that whether or not a binding agreement exists depends on the intention of the parties, as can be inferred from the agreement itself. Whether you are negotiating a HOA or an AFL, ensure that it clearly sets out what you understand to be the agreement, and what you are willing to perform.

For advice on negotiating an Agreement for Lease, please contact Laura Scotton.