A guide for tenants taking commercial leases
Leasing appropriate commercial premises will most likely be a key element of your business plan, and the terms of the lease are instrumental in ensuring the property meets your business requirements. Tenants may try and save costs by not obtaining professional advice at the outset, however it is not always apparent what the full impact of a clause is, and receiving advice and ensuring your business interests are protected can save you money and time in the long run.
While a property being leased can vary from a single unit on a high street or in a shopping center to an entire office building, the issues facing tenants largely remain the same and this article sets out some of the key points which should guide your negotiations.
Property description and plan
This is a key term of the lease which confirms the exact extent of the property you are leasing, care must be taken to ensure the plans outline all parts of the property you will occupy and excludes any areas for which you do not wish to be liable for, such as any service ducts, structural parts (unless you are leasing the whole building) not exclusively serving the premises. We always recommend the use of scale plan drawn up by a surveyor.
The lease should define clearly any additional property over which you require rights, such as to access (with special care as to the timing of the access if the building is closed at night), to store goods or plant, to use shared facilities and loading bays, to connect to conducting media, to carry out repairs or to park a car or other vehicle.
If you are leasing a unit in a large building you will want to make sure the description of the property clearly links with the repairing obligations you will have in the lease. Unless you are leasing the whole building, you will want to ensure you are only liable for the inner shell of the premises covering just the decorated surfaces of the walls together with the floor and ceiling.
Most modern commercial leases have the rent paid quarterly in advance however this can affect cash flow and you may wish to discuss monthly payment of rent. Most leases will also come with a mechanism to review the rent throughout the term based on an open market valuation on certain anniversaries of the lease term. Although most tenants will not like it, reviews are usually on an upward only basis, which means the rent cannot go down if market rents are in decline.
The rent review is essentially the valuation of a hypothetical lease in the open market at the review date, but assuming and disregarding certain things about the lease. Onerous lease clauses should not be deemed to be excluded from the hypothetical lease and the lease should not be deemed to include more beneficial provisions than exist as both these elements will have an impact on the marketability of the lease and accordingly the rent it will attract for the purpose of the review. The assumptions and disregards and their associated issues can be complex and should be discussed with your professional adviser.
This is a long list of obligations you must comply with, and will usually start with the covenant to pay the rent and will list others which are equally as important.
Some covenants which are important are:
- Restrictions on alienation, or selling the lease to a third party
- Use and changes in use
- Alterations to the property, and if so on what terms
- Repairing obligations for you to perform
- Liability for service charges and insurance rent
The landlord will usually seek to prohibit you from altering or selling the lease without their consent. This should always be expressed to as such consent not to be unreasonably denied. The restrictiveness of the tenant covenants will affect the marketability of the property, and hence any future rent review, and should be gone through in detail, taking into consideration your business objectives and any prevailing market conditions which may benefit the landlord.
In many leases the landlord’s obligations are short and usually only require the landlord to let you have quiet enjoyment of the premises (as long as you pay your rent) and insure the building. However if the premises are within a larger building, the landlord (or a third party managing agent) will covenant to provide the appropriate services and maintenance of the building conditional on payment of the service charges.
If the property is within a shopping center you will want the landlord to covenant to ensure all the units have leases of a similar format. This will ensure that all the leases are governed by the same rules, particular those which govern appearance of the units and requirements to keep the shop window dressed. You might also want to ensure the landlord covenants to not grant a lease of an adjacent unit to a business that is in direct competition with you.
The end of the lease term
Most leases will come to an end on the contractual expiry date, where you will return the property to the landlord. The Landlord and Tenant Act 1954 is legislation which gives a tenant occupying the premises for business purposes a statutory right to renew their lease. At the end of the letting the effect of the Act is to extend by statute the lease term until the landlord serves a notice to quit. Until then the tenant is able to stay in the premises on the same terms and at the same rent as the original letting and apply to court for the lease to be renewed. The landlord can oppose this application on several statutory grounds if he wishes to.
This right grants a considerable benefit to the tenant, and accordingly the landlord can require the you to contract out of the right. Whether the right is retained or not affects the value of the lease which in turn affects the rent and any rent review, and you should always take professional advice prior to accepting to contract out.
This is normally understood to mean a clause in the lease allowing either or both parties to end the lease term prematurely. This can be useful if you wish to avoid any rent increases when the rent is reviewed, and give you the opportunity to free yourself from lease premises that are no longer appropriate for your business.
The way a break clause is drafted is important to the functioning of an effective break. The entitlement to break the lease can be triggered by a certain date or be a rolling right from a certain date. Care should be given to the conditions to effectively break, and any conditions should only extend arrears of rent and service charges, or material breaches, and to the property being free of any rights of occupation. Otherwise you may be faced with a landlord who seeks to thwart an effective break by finding breaches of minor covenants, or alleging vacant possession hasn’t been given if any fixtures or fittings are left in the premises.
In addition, rent paid in advance can only be recovered if the lease makes specific provision for this, and you should insist on an obligation for the landlord to repay any rents.
This is just a snapshot of some of the issues which may arise when negotiating a lease. Early legal advice can speed up matters and ensure you do not take on unnecessary risk, or unduly impact your cash flow.
If you feel you need assistance with any of these matters, or have any queries please contact Commercial Property Director Alexander Bak and Associate Angelina Milon on 0207 531 2990.