Commercial Property - Commercial Leases
All leases where the premises are used for business purposes as opposed to residential purposes are governed by the Landlord and Tenant Act 1954 The act provides a complex and growing control of how landlords and tenants contract with each other and serve notices of their intentions upon each other. The principle parts of the legislation are those concerning the ability for the tenant to request a new lease at the end of an existing lease, the liabilities of a tenant who assigns a lease to a new tenant and the process for bringing a tenancy to an end.
“EXCLUDING THE ACT” Where a landlord wishes to retain the right to let premises for a set period and no longer a notice must be served upon the proposed tenant before the lease is completed. This notice is in a proscribed form and warns the tenant that it will be giving up the protection of security of tenure provided by the 1954 Act. No tenant should agree to this without taking independent legal advice. Where such notice is given more that 14 days before the signing of the lease the tenant may sign a declaration stating it is willing to give up its protected position. If the notice is less than 14 days before the state of the lease then the declaration must be sworn as a Statutory Declaration.
“BREAK CLAUSE” This is a clause within the Lease that allows the lease to be brought to an end earlier than the full term. The reason for this may be that the tenant is setting up a new business and wants to “test the water” before being fully committed for a longer term or possibly the landlord is trying to sell the premises and wants the option of offering a Buyer vacant possession to gain a sale. A mutual break allows both landlord and tenant to elect to break the lease early. A tenant’s break gives the option to the tenant alone and similarly a landlord’s break to the landlord alone. Timing of the notice to break is crucial and should allow sufficient time for any trial period to be assessed and then a decision to be made to stay or leave. Usually the tenant will be required to pay the rent to the date of break and carry out any repairs or redecoration.
“GUARANTOR” or “RENT DEPOSIT” When a landlord is unsure of the financial strength of a proposed tenant or that tenant does not have an established track record in say the retail sector the landlord will ask for a guarantor. If the tenant has created a new limited company to hold the lease then it may not want to immediately breach the limited liability by giving a guarantee though the landlord may insist. A compromise may be reached by lodging with the landlord a rent deposit that is governed by a rent deposit deed ensuring that the deposit can be used by the landlord if the tenant defaults or returned to the tenant at the end of a set period once it has a proven record of regular rent payments.
“FRI LEASE” A full repairing and insuring lease is one where that landlord will require the tenant to covenant to keep the premises in good repair and replace any damaged or worn out items and to reimburse the landlord for any insurance premiums paid out for the premises. The reimbursement of insurance is a fair request but it must only be for the appropriate proportion of the building if the premises from part of a larger building or estate. As to repairs, full repairs are fair if the premises are in good repair when let and the term is a reasonable length. If the premises are in obvious need of repair at the time of letting a schedule of condition with photographs as evidence should be prepared and attached to the lease with a clause stating that the tenants repairing obligations are only to keep in the same condition as evidenced by the schedule. If the term is short say 3 or 5 years then the repairs clause should be amended to account for the short term.
“LANDLORD’S COSTS” Often a tenant is required to pay the landlord’s costs in preparing the lease. There is no rule to this as it forms part of the negotiation of a heads of terms. Where a tenant is requested to pay the landlord’s costs a figure should be obtained and if though excessive then the tenant may offer to make a contribution to the landlord’s costs.
“TERM” This is the length of the lease. Lease terms are tending to be shorter for 3 main reasons 1. due to Land Registry requirements for registration of leases with terms greater than 7 years 2. the fact that SDLT is more for longer terms and the premiums paid 3. businesses tend to think in the short to medium term regarding commitments A shorter term with the benefit of the 1954 Act can be renewed several times. This gives the tenant the option at expiry to move out or sign up for another short term. It is well to keep in mind that a lease is a liability to pay rent annually for the length of the term.
“RENT REVIEW” To ensure that the landlord maintains a return on its capital investment in the freehold the rent is usually reviewed at regular intervals of 3 or 5 years. The usual drafting allows for a rent to be agreed between landlord and tenant but if no agreement is reached an independent surveyor will be appointed to fix the rent. Many leases have upward only review clauses. This means that at a review the rent either goes up or stays the same it cannot be reduced. Tenants ought to try to negotiate upward and downward reviews but these are not popular with landlords or their lenders.
“ALIENATION CLAUSE” This is the restrictions placed upon the tenant to assign or sublet the premises. Where a tenant moves into premises that are too big but hopes to grow its business it makes sense for that tenant to be able to share occupation with a sub-tenant. Or if a business out grows it premises and wants to move on again it makes sense for it to be able to assign the premises to a new tenant. The wording of this clause needs careful consideration to ensure that future changes in the tenant’s business needs can be accommodated.
“AGA” An authorised guarantee agreement is a guarantee given by the tenant to the landlord when that tenant wants to assign the premises to another tenant, the assignee. This protects the landlord from agreeing a lease with a tenant of good standing and then that tenant assigning the lease to a tenant without a track record who may default on the payment of rent. If an AGA is in place and the assignee defaults then the landlord can claim the rent from the guarantor.
The views expressed are of a general nature only and are not intended to be used without prior consultation on a specific project