Pre-Lease Agreements, What Are They?
A pre-lease agreement is a legal document that outlines the terms and conditions agreed upon by a landlord and a tenant prior to the execution of a formal lease. It serves as a preliminary contract and signifies a serious intent by both parties to move forward with the rental arrangement. By detailing the terms of the future lease, pre-lease agreements help ensure a mutual understanding and alignment between the landlord and the tenant.
The purpose of a pre-lease agreement is to protect the interests of both parties as they prepare to enter into the more binding lease agreement. It allows for negotiation of terms such as rent amount, security deposit, lease duration, responsibilities for utilities and maintenance, and other miscellaneous factors that are important to the tenant and the landlord . This can be especially beneficial when the property to be leased needs improvements before the beginning of the lease, as these issues can be addressed and agreed upon beforehand.
While pre-lease agreements create a framework for the relationship, they are not subject to the same legal requirements as standard lease agreements. The enforceability of pre-lease agreements may depend largely on the willingness of a court to interpret these documents. Some pre-lease agreements are more formal and function similarly to a letter of intent while others are quite informal. Regardless of how they are drafted, the courts will be less likely to enforce a pre-lease agreement only if it appears to contemplate some kind of further documentation.
Key Aspects of a Pre-Lease Agreement
Although pre-lease agreements are not as formally structured or extensive as typical lease contracts, there are several key components that all parties must take into consideration regarding their rights and obligations. Following is an overview of the essential elements that will often be included in pre-lease agreements:
Identities of Parties: As with most legal documentation, the first component of a pre-lease agreement will describe who the agreement is between, meaning the landlord and the prospective tenant. Since the parties can be different from traditional lease agreements, it is critically important to use the correct legal names of the parties involved.
Property Description: The pre-lease agreement should include a full description of the property that is going to be rented so the parties will have full clarity on the unit being leased. This includes the address, unit number, apartment complex name, the square footage and other details that describe the unit.
Terms and Conditions: As you might expect, the pre-lease agreement should contain all of the terms and conditions of the rental contract, including the duration of the contract, the monthly rent and other costs, any specific requirements of the tenant, information about utilities, maintenance deposits, pet deposits, insurance, etc.
Initial Deposits: Pre-lease agreements often require some kind of initial deposit—sometimes including several different types of deposits that will cover items such as security, cleaning, keys and pet damages. If this is the case, the terms and conditions of those deposits, including how they are to be paid out if the tenant does not sign the standard lease contract, will also need to be included.
Advantages of a Pre-Lease Agreement
There are various benefits from entering into a pre-lease agreement, both for landlords and tenants. From the landlord’s perspective, it provides security from losing a future tenant, especially if the current tenant is not yet ready to leave even though an end date has been given to them. From the tenant’s perspective, they are assured that they can lease the property without competing with any other prospective tenants as they have secured their tenancy in advance.
As a pre-lease agreement is not a binding tenancy agreement, landlords will eventually terminate the agreement to ensure that a tenancy agreement is properly entered into and executed with the tenant. Assuming that a tenant will ultimately occupy the property, landlords will typically sign a one-year term tenancy agreement and credit check the tenant prior to the tenant taking possession.
Risks Involved with a Pre-Lease Agreement
One of the primary risks associated with pre-lease agreements is that circumstances can change between the agreement and move-in date which may affect the tenancy. For example, the space may not be completed on time due to unforeseen delays or the landlord may lose its lot size variance after the pre-lease is signed.
In today’s fluctuating real estate market, market values can also change. For example, the market could improve and once the tenant has entered into a pre-lease the market value could decrease. Whether good or bad however, landlords have the ability to either revise the pre-lease terms or move on to other potential tenants.
Market conditions aside, persons securing space in this manner must be careful to protect themselves in case of unexpected events. If either party fails to perform, the party performing pursuant to the pre-lease agreement needs to cement all contingencies for terminating the agreement to avoid getting stuck in a binding agreement.
How to Create a Pre-Lease Agreement
The steps to drafting a pre-lease agreement will begin to look familiar if you have followed along with our blog series, as it includes advice covered in 5 Things to Know Before Signing a Commercial Lease and How to Prepare for Lease Negotiation. While pre-lease agreements can take many forms, they are typically a short form of agreement that supplements the longer commercial lease, and there are a few common elements to include in any pre-lease agreement.
- Parties: Like in any agreement, you should identify the landlord and the tenant.
- Description of Premises: You should describe the specific premises you seeking a lease for, ideally with the address, square footage, and any other identifying information.
- Rent & Terms: This section will include the basic rent and the time period for which the rent is due. While you may not have agreed on the specifics of your rent during the negotiation , the pre-lease agreement will serve as a bridge to the commercial lease.
- Change of Rent: It is important to note how the rental payments may change overtime.
- Incentives: You should note any incentives provided by the landlord, including rent abatement, upfit allowances, or later termination provisions.
- Default: You will want to notate what would be considered a default under the agreement, and how a default would be handled for the tenant and the landlord.
- Legal Ramifications: The pre-lease agreement should include legal language for amendments, notices, mediation procedures, governing laws, and more.
Again, because the terms of a pre-lease agreement can vary widely, it is always best practice to consult a legal professional.
Typical Pre-Lease Agreement Clauses
For the most part, pre-lease agreements will contain some common clauses. Modern leases often contain similar provisions. The attachment of a lease to the pre-lease agreement can be convenient for the parties by deleting provisions in the pre-lease agreement that are restated in the lease. A common provision is the conditions to move in to the premises. These can include or reference obtaining financing and construction. Also, the approval and execution of a definite lease usually will be required. Almost always, a pre-lease agreement will have maintenance responsibilities and other obligations similar to those in the lease. The lease may be expressly deemed to cover all repairs or none at all, which would be inconsistent with a pre-lease agreement providing for repairs. Another common provision will be the termination of the pre-lease agreement if various requirements are not satisfied. For example, if the parties do not agree on terms, financing is not obtained, or the lease is not executed by a certain date or under certain conditions.
When Should You Use a Pre-Lease Agreement
A pre-lease agreement is used when you want to communicate with the landlord that you intend to move into an apartment or home without actually signing any legally binding documents. Basically, it lets the landlord and you "hold" the rental property so that you have more time to prepare and figure out your decision. Remember, the key here is verbally communicating to them that you want to move in; you are not making a legally binding verbal offer.
Some of the most common situations in which a pre-lease agreement is used is for students seeking housing at the beginning of a school year. Often , these students are just starting out in a new state. Maybe their parents are helping them, or they want to feel out the area before signing a lease for a year.
Another situation is for properties currently under construction. Current tenants may be aware that their lease is coming to an end within the next few months. The landlord may be having new apartments built to move into when their lease expires. But they are unsure if they will get that apartment or if they want it yet, so they can sign a pre-lease agreement to hold onto it while they make their decisions.
If these circumstances fit your situation, then you likely want to use pre-lease agreements.