Prospective tenants who have not entered into a commercial lease before may feel daunted when entering into negotiations. There are lots of issues to consider aside from the rent, and there are pitfalls for the unwary.
Partner & Commercial Property Solicitor, Richard Palmer, sets out some of the main considerations for tenants considering entering into a commercial lease.
Lease term
One of the key things tenants need to negotiate is how long the lease term should last. This might depend on where they see the future of their business. Where a longer term is agreed, tenants may nonetheless wish to negotiate a right to terminate their lease early (known as a break clause), ensure they have the ability to assign their lease to someone else, or sublet the property in case their business plans change.
Rent and rent review
Rent is obviously a key issue, and tenants need to be happy that the amount they will be paying will be appropriate. Lawyers cannot advise on whether the rent is appropriate, but surveyors local to the property will be able to advise tenants on whether they are getting a good deal.
The longer the lease, the more certain it is that the landlord will want to ensure that the rent can be reviewed during the term. Rent reviews can follow different methods, including:
- Stepped increases - where the parties agree, at the outset, fixed rent increases at various points during the term;
- Open market review - where the parties have the opportunity to agree the rent at review, but can refer the review to an independent surveyor for a binding determination based on comparative local rents where they cannot agree;
- Reviews linked to inflation - which are typically set against fluctuations in the Retail Price Index or sometimes the Consumer Price Index.
Tenants should be aware that open market or index linked rent review provisions do not generally provide for rents to go down, so the rent will either stay the same, or go up, depending the property market or inflation.
Again, local surveyors will be able to advise on the appropriate method of review, and this may depend on the market, the type of property, and its use.
Permitted use
The lease will need to set out what the tenant can use the property for. However, even where a landlord agrees to a proposed use, that use may be prohibited by planning control. In some cases a planning permission may need to be obtained for the tenant to use the property for its proposed use.
Repairing obligations and service charges
Repairing obligations should be one of the biggest concerns for tenants, who should expect to be responsible for the repair and condition of the property that they are leasing. Tenants taking a lease of part of a building will not only be directly responsible for the repair and condition of the part of the building that they lease, but will also be required to contribute towards the cost of repair of other parts of the building, such as external and structural parts, and any common areas. These payments are known as service charges.
The standard of repair and condition at which the property needs to be kept will need careful consideration. If a property is in poor repair and condition, but the repairing obligations require the property to be kept to a high standard of repair and condition, it follows that there will be expense for the tenant in putting the property in that standard of repair and condition in order to meet the lease obligations.
The state of repair and condition of other parts of the building should also be considered where the tenant is leasing only part of the building. The greater the cost of the repairs to the other parts of the building, the higher the service charges will be during the term. Major works can take place to these areas during the lease term, for which tenants will be liable to contribute.
Prospective tenants should instruct a surveyor to undertake a building survey to assess the level of repairs required to the property and identify any potential major works required to other parts of the building (to the extent possible), so that the level of repairing obligations and service charges can be negotiated accordingly. For example, it might be possible to agree that the tenant must keep the property in no better state of repair and condition that as evidenced by a photographic schedule of condition, or to agree a cap on the amount of service charges payable in each year.
Termination
Leases cannot be terminated by a tenant during the agreed term unless the lease contains a right for them to do so (known as a break clause). A break clause may be desirable for start-ups who face uncertainty about success, or where the tenant just wants flexibility to be able move on. Most landlords will only agree to include a break clause which allows the tenant to terminate at one or more fixed points during the term, otherwise this creates a lack of income security from the landlord’s perspective.
However, these rights tend to have conditions attached to them, such as the obligation to make sure all rent is paid up to the date that the lease is to terminate, to ensure that there are no belongings remaining on the property, and that any other person in occupation has vacated. These conditions are strictly applied by the courts, meaning that, if they are not met, the lease will not terminate as intended.
Assignment and subletting
Tenants will want the ability to transfer their lease to someone else as another means of exit, or the ability to sublet the property. These rights are usually acceptable to landlords, depending on the circumstances, but usually come with conditions.
Security of tenure
By default, commercial tenants will generally have “security of tenure”. This means that at the end of the lease term, the tenant is entitled to remain in occupation and seek a new lease on substantially the same terms as the previous lease, other than as to the level of rent and other reasonable modifications.
There are a small number of exceptions to this rule, however. For example, a landlord may be able to oppose a new lease or seek to terminate the tenant’s occupation where there are rent arrears or other breaches of the lease, where the landlord wishes to redevelop the property, or where the landlord wishes to use the property for its own use. However, with some grounds for opposition for termination the landlord must meet certain conditions, and with others they can be open to challenge.
Security of tenure can be excluded by agreement between the landlord and the tenant, provided a procedure set out by law is followed. Landlords may want to seek to exclude security of tenure to be able to deal with the property freely after the lease term ends. However, tenants who see the property as a long-term prospect may want the benefits that security of tenure affords.
Contact our Commercial Property team for further advice