Granting a lease or underlease - Purpose of an agreement for...

Learning Outcomes

This article explains the legal effect and principal purposes of an agreement for lease, differentiates it from a lease, identifies common scenarios requiring such agreements, and sets out the formal requirements for validity and enforceability. It covers conditionality (including works and planning), remedies and protection, and typical drafting features so the concepts can be applied to realistic commercial and underletting situations.

SQE1 Syllabus

For SQE1, you are required to understand the legal status, conditionality, protection, and practical drafting of agreements for lease (including underleases), with a focus on the following syllabus points:

• Distinction between an agreement for lease and the grant of a lease (legal vs equitable interests).
• Statutory formalities for validity (section 2 LP(MP)A 1989) and certainty of terms.
• When and why conditional agreements for lease are used (planning, works, consents).
• Equitable lease principles and estate contract protection in registered and unregistered land.
• Registration on grant (leases over seven years) and protecting pre‑completion interests.
• Practical drafting: attaching the agreed form lease, conditions precedent, longstop, and remedies.
• Business tenancies: contracting out of the Landlord and Tenant Act 1954 at the agreement stage.
• Typical scenarios for underleases and the need for superior landlord/mortgagee consent.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main legal effect of an agreement for lease?
2. In what circumstances is an agreement for lease commonly used in commercial property transactions?
3. What statutory requirements must an agreement for lease satisfy to be enforceable?
4. True or false? An agreement for lease always creates a legal estate in land.

Introduction

When parties intend to grant a lease or underlease at a future date, but need conditions to be satisfied first or wish to lock in the transaction ahead of readiness to complete, they often enter into an agreement for lease. In commercial property practice this is core to “pre-let” arrangements, newbuild and refurbishment programmes, and situations requiring third‑party consents or sequencing with other deals (such as a surrender by an outgoing occupier). Understanding its status, conditionality, remedies, and how to protect the interest before completion is essential.

Key Term: agreement for lease
A binding contract to grant and take a lease (or underlease) in the future, usually once specified conditions are satisfied.

The Legal Effect of an Agreement for Lease

An agreement for lease does not itself create a legal leasehold estate. It is a contract to grant (and take) a lease on agreed terms and is enforceable in equity. If valid and sufficiently certain, a court can order specific performance requiring completion of the lease or underlease on the stipulated terms.

Key Term: specific performance
A court order requiring a party to perform their contractual obligations, often used to enforce agreements for lease.

If an agreement for lease is specifically enforceable (for example, it satisfies section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, contains all essential terms and is sufficiently certain), equity may treat it as giving rise to an equitable lease once the contract binds and, commonly, after occupation begins. That equitable lease is a proprietary interest in land (equitable, not legal). Practically, this can have significant protection consequences:

• In registered land, it can be protected by entering a notice on the landlord’s title (LRA 2002).
• If the equitable tenant is in actual occupation, it may amount to an overriding interest on completion of dispositions affecting the title.
• In unregistered land, the agreement (as an estate contract) should be registered as a Class C(iv) land charge; failure to do so can result in loss of priority against a purchaser for value.

Agreements for lease are contracts for a disposition of an interest in land; therefore, section 2 LP(MP)A 1989 applies to agreements of any term. They must be in writing, incorporate all expressly agreed terms either in a single document or in exchanged identical parts, and be signed by or on behalf of each party. E‑signatures may be used, provided execution formalities are satisfied.

Key Term: section 2 LP(MP)A 1989
Requires contracts for the disposition of an interest in land to be in writing, contain all agreed terms, and be signed by all parties.

When Is an Agreement for Lease Used?

Agreements for lease are commonly used where:

• The premises are under construction or undergoing refurbishment and not yet ready for occupation (pre-lets/newbuild and major fit‑outs).
• The grant depends on planning permission, change of use, landlord’s or lender’s consent, or other third‑party approvals.
• Completion must be sequenced with another transaction, such as a surrender of existing occupiers, assignment, or completion of enabling works (e.g. service upgrades).
• Parties wish to secure their future relationship (and pricing/rent terms) while risk is managed through conditions and longstop dates.
• Business tenancies are to be contracted out of the Landlord and Tenant Act 1954; contracting out must be completed before the tenant becomes contractually bound to take the lease—often before exchange of the agreement for lease.

Key Term: conditional agreement for lease
An agreement for lease that is only to be completed if specified conditions precedent are satisfied (e.g. grant of planning permission, completion of works, or receipt of consents).

Essential Requirements for a Valid Agreement for Lease

To be enforceable, an agreement for lease must:

• Comply with section 2 LP(MP)A 1989: be in writing, include all agreed terms (parties, property, term, rent, start date/commencement mechanism, and any conditions), and be signed by or on behalf of both parties.
• Meet the certainty requirement: an “agreement to agree” is void. The agreed form lease is commonly annexed; terms not captured in the agreement will not bind.
• Clearly set out conditions precedent and, ideally, a longstop date and termination mechanics for failure of conditions.
• Address interdependencies (e.g. superior landlord/mortgagee consent, planning decisions, practical completion of landlord’s works, and delivery of collateral warranties/insurance).

Key Term: condition precedent
A contractual condition that must be satisfied before a party is obliged to complete the contract (e.g. grant of planning permission, lender’s consent, or completion of agreed works).

Key Term: practical completion
The stage at which works are complete for the intended use (subject to minor snagging) so the premises can be occupied; often certified by an independent professional.

Key Term: longstop date
A final date by which a condition must be satisfied or completion occur; if missed, the agreement may terminate or trigger specified remedies.

Where the future lease will be for more than seven years, the agreement for lease is an estate contract that should be protected to maintain priority until completion. The future grant itself will trigger registration of the leasehold title on completion.

Key Term: estate contract
A contract to create or transfer a legal estate in land in the future, including an agreement for lease.

Contracting out of the 1954 Act

For business tenancies, if the parties intend to exclude security of tenure under Part II of the Landlord and Tenant Act 1954, the statutory warning notice must be served and the tenant (or a person authorised to do so) must provide the appropriate declaration before the tenant becomes contractually bound—commonly before exchange of the agreement for lease. Failure to contract out in time can inadvertently grant security of tenure.

Worked Example 1.1

A developer is building a new office block. Tech Ltd wants to lease the top floor, but the building is not yet finished. The parties sign an agreement for lease, conditional on the developer completing the works by a set date and obtaining a satisfactory fire safety certificate.

Answer:
The agreement for lease binds both parties to grant and take the lease once the works are completed and the certificate is obtained. If the developer fails to complete, Tech Ltd may be able to claim damages or seek specific performance if appropriate. If a practical completion certificate cannot be achieved by the longstop date, termination may occur in accordance with the agreement.

Main Purposes of an Agreement for Lease

The principal purposes are:

• Certainty: locks both parties into a future grant on defined terms.
• Risk allocation: allows parties to manage development, timing, planning, and consent risks before grant; sets longstop and termination outcomes.
• Conditionality: enables conditions precedent (planning, completion of works to a defined specification and standard, professional certifications, delivery of collateral warranties, and consents).
• Commercial planning: secures occupancy, rental stream, financing, and valuation outcomes ahead of physical readiness; supports developer funding and tenant fit‑out planning.
• Compliance sequencing: ensures statutory steps (e.g. 1954 Act contracting out) and third‑party consents occur before commitment to completion.

Worked Example 1.2

A landlord and tenant agree to grant a lease, conditional on the landlord obtaining planning permission for change of use. Planning is refused.

Answer:
The agreement for lease will usually terminate per its conditionality clause, and neither party is obliged to proceed. No lease is granted, and neither party is liable for breach (unless a party has breached obligations to pursue the application diligently or an alternative remedy is stated).

Key Terms Commonly Included

A well‑drafted agreement for lease will typically specify:

• The parties and property (with a clear description and plan).
• The agreed form lease to be granted (annexed in full).
• The term, rent and rent review provisions (if any), start date/commencement mechanism, and deposit arrangements.
• Conditions precedent: planning, completion of landlord’s works to specification and practical completion, building control sign‑off, delivery of professional certifications and collateral warranties, superior landlord and lender consents, insurance arrangements.
• The timetable for satisfaction of conditions, a longstop date, and consequences if conditions fail (termination, postponement, or alternative remedies).
• Access rights before completion (e.g. for fit‑out) and licence to occupy, if any.
• Contracting out steps for business tenancies under the 1954 Act.
• Remedies for delay or failure to satisfy conditions, including specific performance (where appropriate), damages, termination, and allocation of costs.

Worked Example 1.3

A retailer agrees an agreement for lease of a shop unit in a new mall. The parties intend the lease to be outside the LTA 1954. The landlord serves the warning notice after exchange of the agreement for lease.

Answer:
Contracting out must be completed before the tenant is contractually bound to take the lease. Serving the warning notice after exchange may be too late. The contracting‑out steps should be completed before exchange of the agreement for lease to avoid security of tenure inadvertently arising.

Enforceability and Remedies

If the conditions are satisfied and a party refuses to complete the lease, the other can seek specific performance and/or damages. If conditions precedent are not satisfied by the longstop date, the agreement will usually terminate—no lease is granted and the parties are discharged, subject to any obligations to pursue applications diligently or pay agreed abortive costs.

Where third‑party consent is required (e.g. superior landlord’s consent):

• The agreement can cater for postponement of completion and termination if consent is not obtained by set dates.
• For assignments or underlettings, the Landlord and Tenant Act 1988 requires the landlord to give consent or reasons for refusal within a reasonable time.

It is prudent to incorporate the Standard Commercial Property Conditions (SCPCs) or Standard Conditions of Sale (SCs) by reference where appropriate, modifying them to fit a grant context. These can provide default machinery for consents, delay, and termination. However, the specifics of the agreement for lease should govern where performance of works, certification, and planning outcomes are concerned.

Worked Example 1.4

An agreement for lease requires superior landlord’s consent to underlet. Consent has not been obtained by the contractual completion date, and no unreasonable delay is attributable to either party.

Answer:
The agreement should state what happens: commonly, completion is postponed until consent is obtained or a court declares refusal unreasonable, with a longstop for termination. If the SCPCs or SCs are incorporated, they provide default postponement and, after a defined period (often six months under the SCPCs), a right to rescind.

Registration and Protection

Before completion:

• Registered land: protect the agreement for lease (estate contract/equitable lease) by entering a notice on the landlord’s registered title to secure priority. Failing to protect may risk loss of priority against later registered dispositions.
• Unregistered land: register the agreement as a Class C(iv) land charge against the landlord to protect priority. Without registration, a purchaser for value can take free of the interest.

On completion:

• Leases granted for terms exceeding seven years trigger substantive registration at HM Land Registry, creating a leasehold title. Prescribed clauses must be included in registrable leases granted on or after 19 June 2006 where the landlord’s title is registered.
• SDLT (or LTT in Wales) will be assessed on any premium and the net present value of the rent. Possession or substantial performance can trigger SDLT/LTT even if formal completion is delayed.

Key Term: practical completion
The stage at which the works are complete for occupation, subject only to minor defects that do not prevent beneficial use. The agreement usually identifies who certifies this and the consequences (including rent commencement).

Practical Considerations

• Drafting: annex the full agreed form lease; avoid uncertainty by capturing all terms. Include clear works specifications, certifications, insurance, access, and fit‑out protocols.
• Conditionality and longstop: manage risk through defined conditions, diligent pursuit obligations, and a fair longstop with termination mechanics.
• Due diligence: title investigation, superior interests, planning history and permissions, building regulations compliance, environmental risks, and insurance arrangements.
• Third‑party consents: check mortgagee, superior landlord, and statutory consents early; build reasonable endeavours obligations and timing into the agreement.
• Heads of terms: align with the Code for Leasing Business Premises (2019 professional statement) and ensure heads are comprehensive to ease negotiation.
• Contracting out: undertake the 1954 Act contracting‑out steps before exchange of the agreement for lease where exclusion of security of tenure is intended.
• Protection: register a notice (registered land) or a land charge (unregistered land) to protect priority of the agreement and any equitable lease pending completion.
• Execution: ensure signature formalities are met; electronic signatures may be acceptable if the parties intend to authenticate and any witnessing requirements are satisfied.

Exam Warning

In SQE1, distinguish clearly between an agreement for lease (a contract) and the grant of a lease (which creates a legal estate if by deed and properly registered where necessary). An enforceable agreement for lease may give rise to an equitable lease and can be protected as an estate contract, but it does not itself create a legal leasehold estate.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• An agreement for lease is a binding contract to grant and take a lease in the future; it manages risk and conditionality ahead of grant.
• Compliance with section 2 LP(MP)A 1989 is essential: writing, all agreed terms in one document or exchanged identical parts, and signatures.
• If specifically enforceable, an agreement for lease can give rise to an equitable lease; it should be protected by notice (registered land) or land charge (unregistered land).
• Conditions precedent commonly include planning, practical completion, certifications, delivery of collateral warranties, and third‑party consents, with a longstop date.
• For business tenancies, contracting out of the LTA 1954 must occur before the tenant is contractually bound—often before exchange of the agreement for lease.
• Remedies include specific performance and damages; if conditions fail by the longstop date, termination usually follows per the agreement.
• On completion, leases over seven years require registration and prescribed clauses; SDLT/LTT applies to premiums and rent (NPV).

Key Terms and Concepts

• agreement for lease
• specific performance
• conditional agreement for lease
• section 2 LP(MP)A 1989
• condition precedent
• estate contract
• practical completion
• longstop date