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Conditionality in Agreements for Lease

06 November 2014 #Real Estate


It is not always possible or desirable for an agreement for lease to be unconditional.  Often, there is a need for an agreement for lease where the ultimate grant of the lease is conditional upon certain conditions being satisfied.  This can lead to disputes, where it becomes in the interest of either party to try to wriggle out of its obligation to take the lease.

The major driver for parties seeking to unpick conditional agreements is a change in market conditions; an upward trend in rents between exchange and completion may encourage a landlord to try to take action to secure a better bargain; conversely, a downward market will make a tenant uncomfortable if it has committed itself to terms which prove to be too generous to the landlord.  It is in these circumstances when the drafting of agreements comes under particular scrutiny, whether from contentious lawyers or the Court.

Agreements for lease can be conditional upon a number of matters, but the following are the ones which can cause the most potential for difficulty:

  • Obtaining planning permission.
  • Securing a premises licence (where a change of use to A3 is concerned).
  • The removal of a restrictive covenant or the acquisition of other pieces of land, or the surrender of existing leases or occupational interests.

Agreements conditional on planning

There are a number of issues to consider:

  • Decide who is to apply for planning permission and ensure that the obligation includes employing necessary consultants and paying the planning fee.  Usually, it will be the tenant who applies, but it can be the landlord.  There has been a relatively recent case reported in which a failure to specify whose responsibility it was to secure planning permission was an issue.
  • Fix the timescales upon which planning permission should be applied for.  Unless the party applying has already taken steps at its own risk to prepare a planning application, it will be necessary for there to be sufficient time following exchange of the agreement for the party making the application to prepare the application, along with all necessary drawings and other documents.  Is the landlord’s approval to be sought prior to submission of the application?  Should the application be in joint names.
  • Avoid including unnecessary opportunities for delay.  This can happen in many forms, but most commonly through the agreement providing for endless extensions to the time limits, based upon new applications for planning permission being submitted subsequently, or the withdrawal of earlier planning applications, planning appeals, call-ins and applications for judicial review.  It needs to be clear exactly how far the party applying for permission is expected – and entitled – to go in prosecuting the application.
  • Determine with as much recision as possible the list of unacceptable planning conditions.  It can be in the interest of both parties for planning permission not to be granted with unacceptable conditions but, more usually, it is the tenant making the application who will have certain criteria and in whose interest it will be to keep things as woolly as possible.  It is this small clause in the agreement which will make the difference as to whether the agreement effectively becomes an option or something more concrete than that.  The decision as to whether a permission is acceptable or not needs to be based upon as objective criteria as possible – the party making the decision needs, at very least, to act reasonably.
  • Determine the maximum level of Section 106 contribution acceptable to both parties.  It is worth considering with the architect and/or planning consultants which conditions or Section 106 obligations will or will not be normal or acceptable in the particular case.
  • Make sure that the party obtaining planning permission has to use “reasonable endeavours” to obtain permission within a reasonable or stated timescale.  Use of “best endeavours” and “all reasonable endeavours” will usually be too onerous for most tenants in view of case law which puts an “all reasonable endeavours” obligation on a par with “best endeavours”.

Other common conditions

  • Upon a change of use to A3, a condition for a premises licence to be obtained will be needed.  Care needs to be taken to ensure that the clause is properly negotiated so as to protect the tenant from having to take the lease in the event that the permitted hours of opening granted under the premises licence (or any other stipulations) adversely affect the viability of the proposed business to be carried out from the premises.
  • Conditions requiring the co-operation of third parties need to be carefully framed.  These can include the removal of a restrictive covenant, the acquisition of an additional piece of land or the landlord obtaining vacant possession of the building to be let.  It is important that any obligations do not create an “agreement to agree” or an agreement to negotiate – which are void for uncertainty, but are carefully worded so as to make clear whose responsibility it is to fulfil the condition, the timescale and who is to pay for any premium and the maximum level of that premium.

 Conclusion

As can be seen, there are a number of issues which surround the issue of conditionality in agreements for lease (and other agreements) which can lead to negotiations becoming fraught.  In the recent case of Rentokil Initial 1927 Plc v Goodman Derrick LLP (2014) a situation arose where a developer had tried to wriggle out of its obligations in an agreement conditional on planning.  The agreement, in this case, contained a formatting error but the Court reminded the parties that the construction of the document is “not a game with words” but an attempt to discover what a reasonable person would have understood the parties to mean.  In that case, the developer ought not to have been able to argue (as it had successfully done prior to an earlier arbitration) that planning conditions, including requiring the developer to obtain approvals for schemes of waste management, access and landscaping and foul and surface water drainage (amongst other things) qualified as unacceptable planning conditions.

As much ground work as possible is advisable if it is intended to keep costs down.  Care needs to be taken to ensure that parties, particularly those who have a weaker bargaining position, are properly protected to make sure that what is termed a “conditional agreement” on its face is not, in fact, liable to be treated as a mere option in practice by the other party.

Clarkslegal, specialist Real Estate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Real Estate matter please contact Clarkslegal's real estate team by email at realestate@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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Richard Higgs

Richard Higgs
Partner

E: rhiggs@clarkslegal.com
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