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

Learning Outcomes

By the end of this article, you will be able to explain the legal effect and main purposes of an agreement for lease, distinguish it from a lease, identify when such an agreement is used in practice, and outline the key legal requirements for validity and enforceability. You will also be able to recognise typical scenarios where agreements for lease are essential and apply these principles to SQE1-style questions.

SQE1 Syllabus

For SQE1, you are required to understand the function and legal effect of agreements for lease in the context of granting a lease or underlease. Focus your revision on:

• The distinction between an agreement for lease and a lease.
• The legal status and enforceability of agreements for lease.
• The use of conditional agreements for lease (e.g., subject to planning or completion of works).
• The essential requirements for a valid agreement for lease.
• Practical scenarios where an agreement for lease is necessary before the grant of a lease or underlease.

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 in the future, but certain conditions must be satisfied first, they often enter into an agreement for lease. This is a binding contract to grant (and take) a lease at a later date, once agreed conditions have been met. Understanding the purpose, effect, and requirements of such agreements is essential for SQE1.

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 leasehold estate. Instead, it gives both parties enforceable contractual rights and obligations. If valid, the court can order specific performance to compel the grant and acceptance of the lease on the agreed terms.

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

If the agreement is for a term exceeding three years, it must comply with statutory formalities to be enforceable.

When Is an Agreement for Lease Used?

Agreements for lease are commonly used where:

• The property is under construction or refurbishment and not yet ready for occupation.
• The grant of the lease is conditional on obtaining planning permission, landlord’s consent, or other third-party approvals.
• The parties wish to secure their future relationship before all details are finalised or before certain events occur.

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

Essential Requirements for a Valid Agreement for Lease

To be enforceable, an agreement for lease must:

• Be in writing.
• Contain all the agreed terms (including parties, property, term, rent, and start date).
• Be signed by or on behalf of all parties.

These requirements are set by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.

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

If the agreement is for a lease exceeding seven years, it is also registrable as an estate contract to protect the tenant’s interest.

Main Purposes of an Agreement for Lease

The principal purposes are:

• Certainty: It binds both parties to grant and take a lease on agreed terms in the future.
• Risk allocation: It allows parties to manage risks before the lease is granted (e.g., construction delays, planning refusals).
• Conditionality: It enables the lease to be made subject to conditions precedent (e.g., completion of works, obtaining consents).
• Commercial planning: It allows tenants to secure premises in advance and landlords to secure future income or funding.

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.

Key Terms Commonly Included

A well-drafted agreement for lease will typically specify:

• The parties and property.
• The form of the lease to be granted (often annexed in draft).
• The term, rent, and other principal terms.
• Any conditions precedent (e.g., planning, completion of works).
• The timetable for satisfaction of conditions and completion.
• Remedies for delay or failure to satisfy conditions.

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).

Enforceability and Remedies

If a party refuses to complete the lease after the conditions are satisfied, the other party can seek specific performance or damages. If a condition precedent is not satisfied (e.g., planning permission is refused), the agreement may automatically terminate without liability.

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, and neither party is obliged to proceed. No lease is granted, and neither party is liable for breach.

Registration and Protection

If the agreement for lease relates to a lease of more than seven years, or is otherwise registrable, the tenant should protect their interest by registering a notice (in registered land) or a land charge (in unregistered land). This ensures the tenant’s right to the future lease is enforceable against third parties.

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

Practical Considerations

• Drafting: The agreement should be clear, precise, and include all essential terms.
• Due diligence: Parties should check title, consents, and any conditions before signing.
• Remedies: The agreement should specify what happens if conditions are not met or if there is delay.

Exam Warning

In SQE1, be careful to distinguish between an agreement for lease (a contract to grant a lease in the future) and a lease itself (which creates a legal estate). Only a lease gives the tenant a proprietary interest in the land from the outset.

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, often subject to conditions.
• It does not itself create a leasehold estate but gives contractual rights enforceable by specific performance.
• The agreement must be in writing, contain all agreed terms, and be signed by all parties (s2 LP(MP)A 1989).
• Agreements for lease are commonly used where the property is not ready or consents are needed before the lease can be granted.
• If the agreement is for a lease exceeding seven years, it should be protected by registration.
• The main remedies for breach are specific performance or damages.
• Always distinguish an agreement for lease from a lease itself in SQE1 questions.

Key Terms and Concepts

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