What is a Pre-Let Agreement?

What represents a pre-let agreement?

A pre-let agreement is simply an agreement between a landlord and a prospective tenant to enter into a lease at a date in the future. This is often contingent upon the satisfaction of certain conditions such as the completion of a building or fit-out project. Unlike a lease, a pre-let does not create an immediate legal right to exclusive occupation of the premises but does create contractual rights and obligations between the parties.

Commercial benefits of pre-let and pre-lease agreements

Pre-let agreements, also known as pre-tenancy agreements or pre-lease agreements, perform a crucial role in aiding fluidity of the commercial real estate market in Jersey. The facilitate relocation from existing business premises into new or refurbished premises whilst also providing a period of time in which tenants can end their existing occupation arrangements, whether by breaking or assigning a lease. For landlords, they mean that a future income stream can be secured before any money is spent constructing or fitting out premises in order to make them suitable for a future tenant.

Why are pre-let agreements important?

Without some degree of certainty that a lease will be granted at a future date, tenants and landlords would be exposed to various risks. In the case of a landlord, it could be required to expend significant time and expense in securing necessary consents, carrying out a refurbishment or fit out, or possibly even constructing a new building in accordance with a tenant’s specifications. A landlord may suffer an extended void period and additional costs in securing a replacement tenant and might even need to refit the premises to make them suitable for a different tenant. For a tenant, it may be forced into temporary accommodation whilst it locates suitable alternative premises with the consequent risk of interruption to its business.

The primary function of a pre-let is to provide as much certainty as the law will permit to the parties that the lease will be entered into at the requisite time in the future on the satisfaction of certain conditions. Pre-lets provide clarity around important issues such as time frame for completion of works, responsibility for obtaining consents and the consequences of a breach. They are complex legal documents requiring the parties to substantially agree both the framework for the grant of the lease and the terms of the lease itself.

The contractual obligations on the landlord to grant a lease and the obligation on the tenant to accept the lease are often supported by way of a ‘liquidated damages’ clause. These clauses provide a predetermined level of damages that will apply in the event of a failure to enter into the lease at the relevant time. The level of such damages is generally a matter for negotiation but are often substantial so as to provide sufficient incentive for both parties to perform. This is particularly important in the cases of leases for more than nine years, where completion involves passing the contract before the Royal Court and are not specifically enforceable – that it to say the Court will not compel any person to pass contract against their will. It is a pre-requisite that such damages must reflect a genuine pre-estimate of the loss that would be suffered by the aggrieved party.

A pre-let agreement, therefore, provides a means by which both a landlord and a tenant can seek to mitigate certain risks associated with the grant of a new lease. Due to the complex nature of the document and the often competing interests of landlord and tenant, parties are well advised to take legal advice before entering into a pre-let agreement.