An agreement for lease is a contract to grant and take a lease at a future date, usually over premises that do not exist yet. It is the document that lets a developer sign a tenant to a building that is still a set of drawings, and it is the reason a commercial or mixed-use project can be funded, valued and sold as income rather than as a construction site. The lease itself comes later, when the building is finished and the tenant takes possession.
Before considering an agreement for lease, you’ll need professional advice from a property lawyer, and on the money side from your accountant. The obligations in an agreement for lease run one way for the most part: the developer promises to build a specific thing, to a specific standard, by a specific date, and the tenant promises to take it if that happens. If the building is late, short on area, or not to the specification annexed to the agreement, the consequences land on the developer, in the form of rent abatement, damages, or a tenant walking away from the deal the funding was built on. An agreement for lease can also create rights over the land that show up when you try to sell or refinance. This guide is written to inform that conversation with your lawyer, not to substitute for it, and there is a list of questions at the end that a lawyer and an accountant can answer on your facts.
The rules, cases and figures below were current when this guide was written and they move, particularly the retail leasing statutes and the duty provisions. Each primary source is linked where it is relied on, and that source is the place to confirm the current position.
What is an agreement for lease, and how is it different from a lease?
An agreement for lease is a contract to enter into a lease in the future. A lease is the grant of the estate itself. The distinction matters because until the lease is granted, the tenant generally has contractual rights against the developer rather than a legal estate in the land, and the developer has an obligation to perform rather than a rent roll.
In practice the two documents are usually prepared and negotiated together. The agreement for lease sets out the conditions to be satisfied, the works the developer will carry out, the date by which they will be carried out, and the mechanism for determining the rent and the area. The form of lease that will eventually be signed is annexed to it, fully drafted, so that neither side is negotiating terms once the building is up. A tenant who signs an agreement for lease with a blank or incomplete annexed lease is generally agreeing to negotiate later, which is a different and weaker deal for both sides.
Several state statutes treat the two as a single continuum for their own purposes. The New South Wales Duties Act 1997 defines “lease” for the relevant chapter as “a lease of land in New South Wales or an agreement for a lease of land in New South Wales”. Victoria’s Retail Leases Act 2003 deals expressly, in section 17(7), with the case where a disclosure statement is given before the parties enter an agreement for a retail premises lease. The point for a developer is that signing an agreement for lease is not a neutral, preliminary step. It can be the moment that a statutory clock starts, a duty liability arises, or a caveatable interest is created.
Agreement for lease, heads of agreement, and letter of intent
These three are commonly used loosely and they are not the same thing. A letter of intent or heads of agreement usually records the commercial terms and is intended to be non-binding except for confidentiality and exclusivity. An agreement for lease is intended to bind. The danger sits in the middle, where a document says it is subject to a formal contract but the parties then behave as though the deal is done.
The leading authority is Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353, where the High Court set out the categories into which a preliminary agreement may fall: the parties may intend to be bound immediately while proposing to restate the terms in a fuller document, they may intend to be bound immediately but with performance conditional on a formal document, or they may intend not to be bound at all until a formal document is executed. In that case the memorandum was expressed to be “made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors”, and the Court held no binding contract had been formed. Which category a given heads of agreement falls into tends to be a question of construction and conduct, which is exactly why it is a lawyer’s question rather than a drafting exercise for the development manager.
The related risk is estoppel. In Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387, a landowner demolished an existing building and began construction on the assumption that a lease to Waltons would be completed, while Waltons let him continue in that belief and never signed. The High Court held Waltons was estopped from denying the contract. The case is usually taught from the landowner’s side, and it is a reminder that a party who stands by while the other side spends money in reliance on an unsigned deal may find the deal enforced against them. That doctrine runs in both directions, so a developer who encourages a prospective tenant to commission fit-out design or terminate an existing lease before signing is standing on the same ground.
Why would a developer use an agreement for lease?
Because a commercial project is generally worth more with committed income than without it, and because you cannot grant a lease over premises that do not yet exist. The agreement for lease is the bridge between those two facts.
The common uses are a pre-commitment on a new building, where an anchor or whole-of-building tenant signs before construction starts; a build-to-suit, where the building is designed around a single occupier’s requirements; a major refurbishment, where an existing tenant or a new one commits to space that is being reconfigured; and a staged development, where later stages depend on leasing outcomes in earlier ones.
The value effect is the reason it sits in the feasibility rather than in the legal file. A completed income asset is generally valued by capitalising its sustainable net income at a market yield, so the lease you sign during the development period is the input that drives the end value. Our guide on capitalisation rates sets out how that arithmetic works. A pre-commitment also tends to change the funding conversation, because a building with a signed tenant presents as income with construction risk rather than as construction risk with a leasing hope attached. The mechanism is that committed income supports the take-out valuation and the interest cover a financier tests against, so the leasing risk is priced out of the facility rather than into it, and our guide on construction finance covers how those facilities are structured. What that is worth on a given project is a question for a current term sheet.
The trade is that all of this is bought with obligations. The tenant is committing to a building sight unseen, so it will want certainty on what gets built, when, how big it is, and what happens if any of that slips. Those four questions drive most of the negotiation.
What does an agreement for lease actually bind the developer to deliver?
It binds the developer to hand over defined premises, built to an annexed specification, by a defined date, at a measured area, with the services and approvals needed for the tenant to occupy. Each of those is a place where a project can leak money.
The specification and the lessor’s works
The works the developer must carry out are usually described in an annexed specification, sometimes with drawings and a finishes schedule. The line between lessor’s works (base building, sometimes a fitted category of works) and tenant’s works (fit-out) is one of the most consequential lines in the document, because anything on the developer’s side of it is a cost in the feasibility and anything on the tenant’s side is not.
Two traps tend to recur. The first is a specification described by reference to a standard rather than a scope, for example premises “of a quality consistent with a premium grade building”, which invites an argument at handover. The second is a specification that is more detailed than the builder’s contract, so the developer has promised the tenant something the building contract does not require the builder to deliver. Aligning the agreement for lease specification with the construction contract scope is ordinary practice for a reason, and it matters most under a design and construct contract, where the builder carries design responsibility and the tenant’s requirements have to be passed down intact.
The date, and what happens when it slips
An agreement for lease generally carries at least two dates: a target date for practical completion or handover, and a longstop or sunset date after which one or both parties may terminate. Between them sits the commercial consequence of delay, which may be rent abatement, an agreed sum per day, a right for the tenant to carry out the works itself, or nothing at all beyond the termination right.
Extension mechanisms are where the negotiation gets technical. An agreement for lease often allows the delivery date to move for defined causes, commonly force majeure, tenant-caused delay and variations requested by the tenant, and often mirrors the extension of time regime in the building contract. Where the two do not mirror each other, the developer carries the gap. A builder entitled to an extension of time under the construction contract for an event that is not a permitted cause of delay under the agreement for lease leaves the developer exposed to the tenant with no corresponding relief upstream.
The sunset date deserves separate attention because of what sits behind it. If the tenant can walk at a date that falls before the realistic completion date on the current programme, the developer may be carrying a completed or near-completed building with no tenant and a funding structure that assumed one.
Area, and how the rent is fixed for a building that does not exist
Rent in a pre-commitment is usually expressed as a rate per square metre per annum applied to a lettable area that will be measured after completion. That makes area a live financial variable rather than a fact, and it is worth treating as such in the feasibility.
The measurement method is normally specified, and in the Australian market the Property Council of Australia’s published method of measurement for lettable area is the common reference, with the survey carried out by an independent surveyor after completion. Our guide on lettable and saleable area sets out how the measures differ and why the difference is not trivial. The agreement for lease will usually also deal with what happens if the measured area differs from the area assumed at signing: the rent may simply adjust, or the tenant may have rights if the shortfall exceeds a threshold, often expressed as a percentage of the assumed area.
The developer-side consideration is that a design that loses lettable area during documentation, through a larger core, thicker facade build-up, or a services reconfiguration, may reduce the rent line and therefore the end value, while leaving the construction cost broadly where it was. A tolerance band in the agreement for lease converts that design risk into a contractual one.
Access for fit-out, completion, and defects
The agreement for lease usually sets out when the tenant can get in to start its own fit-out, often a period before practical completion, and on what terms, since the tenant’s contractors will be working alongside the builder. It will also define what practical completion or handover means for the purposes of the lease starting, who certifies it, and how disputes about it are resolved. Whether the certifier is the superintendent under the building contract, an independent expert, or the tenant’s own consultant changes who effectively controls the rent commencement date.
Defects are handled either by carrying the building contract’s defects liability regime through to the tenant, or by a separate rectification obligation in the agreement for lease. Where the two do not line up in duration or scope, the developer may be left owing the tenant a rectification obligation after the builder’s liability has run out.
What conditions precedent usually sit in an agreement for lease?
Conditions precedent are the things that must happen before the parties are obliged to proceed, and in a pre-commitment they usually include planning and building approvals, finance, and in many cases a leasing threshold.
The common set includes a development consent or planning permit on terms acceptable to both parties, construction approval, the developer obtaining finance for the project, board or head office approval on the tenant’s side, head landlord or mortgagee consent where the developer’s own title is encumbered, and in multi-tenanted buildings a pre-commitment threshold expressed as a percentage of lettable area or income committed before construction starts.
Two features of conditions are worth attention. The first is who they benefit and who can waive them, because a condition expressed for the benefit of both parties generally cannot be waived unilaterally, and a condition that only the tenant can waive gives the tenant an exit. The second is the date each condition must be satisfied by, and what happens on failure: automatic termination, a right to terminate, or an obligation to negotiate. A finance condition with no end date is, in substance, an open-ended option in favour of whichever party can invoke it.
For a developer, the condition that most often creates friction is planning. A consent granted with conditions that change the building, reduce the area, or add cost may be “acceptable” to the developer and not to the tenant, or the reverse, and the agreement for lease is where that disagreement is resolved in advance or left to be fought about later.
Does the tenant get an interest in the land before the lease is granted?
Generally yes, in equity. An agreement for lease that is specifically enforceable has long been treated as giving rise to an equitable lease, and that is an interest in the land rather than a purely personal right against the developer.
The High Court considered the limits of this in Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242, where a landlord agreed in writing to lease Torrens title land in Queensland for a term exceeding three years, the lease was executed but never registered, and guarantors were sued after the tenant defaulted. The Court accepted that the agreement gave rise to an equitable lease but held that the guarantee, expressed by reference to obligations “under this lease”, did not extend to the tenant’s obligations under the unregistered equitable lease. The case is usually cited for two propositions that matter here: an agreement for lease can create an equitable interest, and an equitable interest is vulnerable in ways a registered legal interest is not, including to a purchaser of the legal estate for value without notice.
The practical consequence for a developer is the caveat. A tenant holding an agreement for lease may have a caveatable interest, and a caveat lodged against the development site can interfere with a sale, a refinance, or the registration of other dealings at precisely the point in the programme where that is most expensive. Our guide on caveats on title covers how they operate and how they are removed. Whether the agreement for lease permits or prohibits caveating, and whether the developer has an express right to have one withdrawn on settlement of a sale, is a drafting question that tends to get overlooked until it matters.
Registration of the eventual lease is a related point. Under the Torrens statutes, longer leases are dealt with differently from short ones: in New South Wales, section 42(1)(d) of the Real Property Act 1900 protects a tenant in possession under a tenancy not exceeding three years against the indefeasible title of a registered proprietor, and leases for longer terms are generally registered so that they bind a subsequent owner. For a developer intending to sell the completed asset, an unregistered long lease is a defect a purchaser’s lawyer will find, so the registration pathway is usually dealt with in the agreement for lease rather than left to the end.
Do the retail leasing statutes apply to an agreement for lease?
If the premises are retail premises under the relevant state or territory statute, the disclosure and minimum term rules apply, and the timing of disclosure is the trap. Every Australian jurisdiction has a retail leasing regime, each with its own disclosure period and its own consequences for getting it wrong, and those consequences generally run against the landlord.
The reason this bites harder on a pre-commitment than on a standard lease is timing. Disclosure obligations are framed around the moment a lease is “entered into”, and in a pre-commitment that moment may be a year or more after the commercial deal was struck. Whether disclosure has to precede the agreement for lease, the lease, or both is the question to put to a lawyer before the agreement is signed rather than after.
New South Wales
Under section 11 of the Retail Leases Act 1994, “at least 7 days before a retail shop lease is entered into, the lessor must give the lessee a disclosure statement for the lease”, with a maximum penalty of 50 penalty units. If the statement was not given, or was incomplete or materially false or misleading when given, the lessee may terminate the lease by written notice within 6 months after it was entered into, and under section 11(2A) may recover compensation for costs reasonably incurred in connection with entering the lease, “including compensation for expenditure by the lessee in connection with the fit-out of the retail shop”. There is a defence under section 11(3) where the lessor acted honestly and reasonably and the lessee is in substantially as good a position.
The timing hook sits in section 8, which provides that a retail shop lease is considered entered into when the lessee enters into possession or begins to pay rent, whichever happens first, or as soon as both parties have executed the lease if that happens earlier. A deposit paid to secure premises for a proposed lease is expressly not rent for this purpose. The consideration for a developer is that possession for fit-out can be the trigger, which puts the disclosure deadline well before handover.
Victoria
Victoria is the jurisdiction that deals with agreements for lease most directly. Under section 17(1) of the Retail Leases Act 2003, the landlord must give the tenant a disclosure statement in the prescribed form and a copy of the proposed lease at least 14 days before entering into a retail premises lease. Two consequences are worth knowing before you sign anything.
First, section 17(1C) provides that if the disclosure statement and proposed lease are given less than 14 days before the lease is to be entered into, “the term of the lease is taken to commence 14 days after the disclosure statement and proposed lease are given to the tenant”. That is a rent commencement date moving on its own, which flows straight into the cashflow.
Second, section 17(7) provides that if the tenant was given the disclosure statement before entering into an agreement for a retail premises lease, no further disclosure statement is required before the lease is subsequently entered into, provided that lease is in accordance with the earlier agreement. The corollary is the trap: a lease that departs from the agreement may take the arrangement outside that relief. Section 17(2) and (3) also allow a tenant who was not given the statement to give notice between 7 and 90 days after entering the lease, withhold rent until the statement is given, and terminate within 7 days after it is finally given. Under section 17(5) and (6), misleading, false or materially incomplete information can support termination within 28 days.
Victoria also carries an exclusion threshold based on occupancy cost, with premises falling outside the Act where annual occupancy costs exceed a prescribed amount, and a set of ministerial determinations that carve out particular premises and leases. The current threshold and determinations are published by the Victorian Small Business Commission, and a large pre-commitment is exactly the kind of deal where the threshold may be in play.
Queensland
Under section 21B of the Retail Shop Leases Act 1994, the lessor must give a prospective lessee a disclosure statement at least 7 days before the prospective lessee enters into a retail shop lease. Queensland allows the period to be shortened where the prospective lessee gives a waiver notice together with a legal advice report confirming a lawyer has explained the meaning and effect of the waiver, which is a mechanism that does not exist in the same form everywhere.
Western Australia
Section 6 of the Commercial Tenancy (Retail Shops) Agreements Act 1985 requires a disclosure statement at least 7 days before the lease is entered into. Where that does not happen, or the statement is incomplete or contains false or misleading information, the tenant may within 6 months either give written notice of termination, in which case the lease terminates 14 days after the notice, or apply to the Tribunal for compensation for pecuniary loss. An honest and reasonable conduct defence applies in similar terms to the New South Wales provision.
South Australia
Section 12 of the Retail and Commercial Leases Act 1995 requires the lessor or the lessor’s agent to give the lessee a signed disclosure statement before the retail shop lease is entered into, with a maximum penalty of $8,000. A disclosure statement is not required on the renewal of a lease. South Australia’s Act also reaches commercial premises in some respects, which is a distinction worth confirming rather than assuming from the experience of other states.
Australian Capital Territory
Section 30 of the Leases (Commercial and Retail) Act 2001 requires the lessor to give a disclosure statement for the proposed lease at least 14 days before the lease is entered into. The time limits may be waived or varied where the tenant provides a certificate signed by a lawyer confirming the tenant is aware of the limits and has chosen to waive or vary them.
Northern Territory
The Business Tenancies (Fair Dealings) Act 2003 governs retail shop leases in the Northern Territory and runs a two-way disclosure regime: the landlord gives a landlord’s disclosure statement, and the tenant must give a tenant’s disclosure statement not later than 7 days after receiving it, or within a further period the prospective landlord agrees to.
Tasmania
Tasmania’s operative instrument has been the Code of Practice for Retail Tenancies made under the Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998, which includes landlord disclosure obligations. Tasmania has been working through a transition in this area, so the current position is worth confirming with Consumer, Building and Occupational Services before relying on the Code.
The minimum term point
Several of the retail statutes impose a minimum term, commonly five years, subject to mechanisms that allow a shorter term where the tenant obtains a certificate or waiver. On a pre-commitment this interacts with the delivery programme, because the term usually starts at handover rather than at signing, and a tenant that wants a short term in a retail centre may need a step that has to be completed before the lease is entered into. Our guide on commercial lease structures covers how the retail and non-retail classifications change what is permitted in the lease itself.
Is duty payable on an agreement for lease?
It depends on the state and on whether anything other than rent is being paid, and the answer is not always no. Duty on ordinary leases has been abolished in most Australian jurisdictions, but the abolition is not complete, and an agreement for lease can be the instrument that attracts it.
In New South Wales, Revenue NSW records that duty on leases was abolished on 1 January 2008. What survives is narrower and directly relevant here. Section 8(1)(b) of the Duties Act 1997 lists as a dutiable transaction “a lease in respect of which a premium is paid or agreed to be paid”, and section 8(3) defines “lease” to mean “a lease of land in New South Wales or an agreement for a lease of land in New South Wales”. The Act also flags, in the note to section 8, that section 9C provides for circumstances in which a novation of an agreement for the lease of land in New South Wales is taken to be a transfer of dutiable property. A developer who sells a project, or restructures the entity that holds it, and novates the agreement for lease in the process is in territory where that provision needs to be checked.
In Victoria, section 7 of the Duties Act 2000 treats as a dutiable transaction the grant of a lease of land in Victoria for which any consideration other than the rent reserved is paid or agreed to be paid, and extends to arrangements by which the lessee or an associate obtains a right or interest in the land beyond the leasehold estate. The State Revenue Office sets out how it applies the lease provisions in its guidance on duty on the grant, transfer or surrender of a lease. Victoria’s definition of “lease” for these purposes also picks up an agreement for a lease.
The other states and territories each take their own position, and the question of whether a given incentive, capital contribution or fit-out payment amounts to a premium or to consideration other than rent is the kind of characterisation question that turns on the documents. It is a question for your lawyer and your accountant together, before the agreement is signed rather than after the revenue office asks.
How are incentives and contributions treated?
An incentive is the consideration a developer gives a tenant to sign, and how it is structured changes its treatment for goods and services tax (GST), for income tax, for accounting, and for what a valuer does with it. The main forms are a rent-free or rent-abated period, a cash contribution, a contribution to or delivery of the tenant’s fit-out, and the assumption of the tenant’s existing lease obligations.
On GST, the Australian Taxation Office’s view is set out in GSTR 2003/16, which deals with inducements to enter into a lease of commercial premises. The distinction it draws is between an inducement that is solely monetary, where the entity providing the money is generally not treated as making a supply, and one that wholly or partly consists of non-monetary consideration, where there may be two separate supplies, each of which may be taxable. A fit-out contribution tied to the tenant doing something in return is a different proposition from a cash payment, and the documents decide which it is. Our guide to GST on property development covers the wider treatment across a project.
On accounting, AASB 16 Leases defines lease incentives as payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee, and requires a lessor to recognise lease payments from an operating lease as income on a straight-line basis or another systematic basis where that is more representative. The commencement date under the standard is the date the lessor makes the underlying asset available for use by the lessee, which on a pre-commitment is handover rather than signing. The practical effect is that the incentive is generally spread across the term rather than expensed when it is paid, so the reported income and the cash rarely line up in the early years.
On valuation, the point to hold is that a face rent supported by a large incentive is not the same income as the same face rent without one. Buyers and valuers generally look through to effective rent or deduct the unamortised incentive as a capital item, which is why an incentive given away to hold a headline rent tends to reappear as a deduction at the sale.
How does a pre-commitment change the feasibility?
It changes the revenue side, usually by supporting a keener capitalisation rate and removing a letting-up allowance, and it changes the risk profile of the cost side by fixing a delivery obligation. Both effects can be modelled, and the arithmetic is worth doing before the incentive is agreed rather than after.
The following illustration uses assumed inputs and is included to show how the pieces reconcile, not as a benchmark for any project.
A developer is building a 6,000 square metre industrial facility. Assume total development cost of $11,000,000, made up of land at $2,400,000, construction at $7,200,000 (being $1,200 per square metre) and all other costs including professional fees, finance and holding costs at $1,400,000.
With a pre-commitment, the tenant signs an agreement for lease at a net face rent of $145 per square metre per annum on a net lease, giving annual net income of $870,000. Assume a capitalisation rate of 6.25 per cent, so the capitalised value is $13,920,000. The incentive is 15 per cent of face rent across a ten year term, which is $1,305,000, deducted as a capital item. The value net of incentive is $12,615,000, against total development cost of $11,000,000, for a profit of $1,615,000 and a margin on cost of 14.7 per cent.
In a second scenario the only changed inputs are the absence of a pre-commitment at completion, a capitalisation rate of 6.75 per cent rather than 6.25 per cent to reflect leasing risk, and a purchaser’s deduction of twelve months of income as a letting-up allowance. The incentive stays in the calculation because a purchaser of a vacant building assumes it will have to be given to secure a tenant. The capitalised value becomes $12,888,889, less the letting-up allowance of $870,000 and the same incentive of $1,305,000, giving $10,713,889 against the same $11,000,000 of cost. That is a loss of $286,111, or a negative margin on cost of 2.6 per cent.
The gap between those two outcomes, on identical buildings, is the thing the agreement for lease is buying. It is also the reason the delivery obligations inside it are worth pricing: an abatement regime that hands back several months of rent, or a tolerance on area that allows a rent reduction, moves the same numbers in the other direction. Where and when the money actually moves through the project is a separate question again, and our guide on development cashflow modelling covers how the income start date and the incentive payment sit in the cashflow.
One further consideration on the exit: an agreement for lease that has not yet converted into a lease is a contract, and a purchaser of the development will usually want it assigned or novated, together with the benefit of the builder’s warranties. Whether that assignment needs the tenant’s consent, and what the tenant can ask for in exchange, is a term worth settling when the agreement is drafted rather than when the sale is on foot.
What changes in New Zealand?
The structure is similar and the terminology differs: the market generally speaks of an agreement to lease, and the standard form published by the professional bodies is widely used rather than a bespoke document. Two points are worth noting for an Australian developer working across the Tasman.
First, section 24 of the Property Law Act 2007 provides that a contract for the disposition of land is not enforceable by action unless the contract is in writing or its terms are recorded in writing and signed by the party against whom enforcement is sought. That section is subject to the doctrines that allow a court to enforce an oral contract in some circumstances, and the New Zealand courts have been willing to find binding commitments in negotiations conducted before a formal lease was signed. Second, New Zealand has no direct equivalent of the Australian states’ retail leasing disclosure statutes, so the protections a retail tenant would expect in Sydney or Melbourne are largely a matter of the contract.
What to ask your lawyer, your accountant and your project team
The questions below are the ones a specialist can answer on your facts and this guide deliberately does not.
For your property lawyer
- Is the document we are signing an agreement for lease, or something that might fall into one of the Masters v Cameron categories short of a binding contract, and is that what we intend?
- Do the retail leasing statutes in this jurisdiction apply to these premises, and if so, does disclosure have to precede the agreement for lease, the lease, or both?
- On this state’s provisions, what exactly triggers the “entered into” date, and does early access for fit-out trigger it?
- What termination and compensation rights does the tenant have if our disclosure is late, incomplete or wrong, and what would they cover on this deal?
- Do the permitted causes of delay in the agreement for lease match the extension of time regime in the building contract, and where is the gap?
- Who certifies practical completion for the purposes of the lease starting, and what happens if the tenant disputes it?
- Can the tenant caveat the title, and if so, what right do we have to have the caveat withdrawn for a sale, refinance or registration of another dealing?
- What is the area tolerance, what happens if the survey comes in below it, and who pays for the survey?
- Can we assign or novate the agreement for lease to a purchaser of the development without the tenant’s consent, and does the annexed lease carry across?
- Does the annexed lease need to be registered, and who bears the cost and the obligation to procure registration?
- If the tenant fails to take the lease when the building is finished, what do we actually have: a damages claim, specific performance, security, or a guarantee, and who is on the other end of it?
For your accountant and tax adviser
- Is anything in this deal a premium, or consideration other than rent reserved, that could make the agreement for lease a dutiable transaction in this state?
- If we sell the project or restructure the holding entity, does novating the agreement for lease trigger duty?
- How is the incentive treated for goods and services tax (GST) on the structure we have chosen, and does the fit-out contribution create a supply by the tenant?
- Who owns the fit-out we are contributing to, and what does that do to the depreciation position and to make-good at the end of the term?
- How will the incentive and the rent-free period be recognised in the accounts across the term, and what does that do to reported earnings against actual cash?
- If we hold rather than sell, what is the capital works and plant depreciation position on the base building and the fitted works?
For your quantity surveyor and project manager
- Does the annexed specification match the construction contract scope line for line, and where does it exceed it?
- What is the realistic date for practical completion on the current programme, and how much contingency sits between that and the sunset date in the agreement for lease?
- What is the cost of the lessor’s works that sit above a standard base building, and is that in the feasibility as a separate line?
- What lettable area does the current documentation deliver, measured on the specified method, and how has it moved since the area assumed in the agreement for lease?
For your valuer
- How would you treat this incentive structure in a valuation of the completed asset: effective rent, or face rent with a capital deduction?
- What evidence supports the capitalisation rate difference between this asset let to this tenant on this lease and the same asset delivered vacant?