The lease is the principal document setting out the contractual relationship between the owner of a property (the landlord) and the occupier (the tenant). The content of the lease will vary depending on the property type, its physical condition, the relationship between the landlord and the tenant (their relative bargaining powers) and the state of the property market.
Below are some frequently asked questions concerning commercial lease provisions.
What are the key areas covered in a lease?
The key areas are the length of the lease, rent and other payments to be made by the tenant, service charge, repairs and decoration, alterations, use and dealing with the tenant’s interest in the lease.
Can you negotiate on the terms of an existing lease?
If you are acquiring an existing lease, its terms are not normally open to negotiation. However, we would advise that the lease terms are reviewed carefully as the value of a property can be adversely affected by unusual or restrictive terms.
Can you negotiate on a new lease?
Where a new lease is being granted, the contractual terms can usually be negotiated (even if the landlord states otherwise). Upon receipt of the draft lease from the landlord’s solicitors, as your legal advisors we will review its provisions, discuss them with you and put forward amendments for discussion/negotiation.
Are lease provisions regulated or standardised in England and Wales?
No, lease provisions are not heavily regulated in England and Wales. There is a code of practice, the Code for Leasing Business Premises (see here) but, as it is a voluntary code, leases are often not ‘Code compliant’.
Is there a typical lease length for commercial leases?
The period of time for which a commercial lease is granted (called the “term”) will vary depending upon the nature of the letting and the requirements of the landlord and the tenant. They are rarely granted for more than 25 years. In recent years, the trend has been for considerably shorter leases and the average length is now around eight years.
What is a break clause?
A break clause is an option for either the landlord or the tenant (or both) to end the lease before the end of the term, usually on a specified date by giving notice. Break clauses are frequently included in commercial/business leases.
A break clause can significantly affect the investment value of a property. If exercised, the income from the property will stop until the property is re-let. For this reason, when valuing property, it is normal to assume that a tenant’s break will be exercised. As a result, tenants often need to pay a higher rent for the flexibility of a break clause.
Can the contractual term of a commercial lease be extended?
Yes. Subject to satisfying certain criteria, business tenants have a statutory right under the Landlord and Tenant Act 1954 to extend the contractual term of their lease. At the end of the lease, the tenant can ask the landlord for a new lease.
The landlord has some limited grounds to resist the tenant’s request (the most common being that the landlord needs the property for its own occupation or wants to redevelop it). Even then compensation may be payable to the tenant.
However, it is possible for the parties to agree (prior to the grant of the lease) that the tenant will not have these renewal rights. A specified procedure involving the service of statutory notices and the swearing of a declaration needs to be followed to ‘exclude’ the lease from the 1954 Act. The right to renew a business lease is a valuable tenant right and you should think carefully before agreeing to the lease being excluded from the 1954 Act.
Can a commercial lease include provisions to change the rent payable?
Yes. Leases over five years normally include provisions to review (change) the rent at specified intervals during the term. These lease provisions are called ‘rent review’ provisions. Rent reviews are commonly negotiated between the landlord and the tenant by referring to the rents achieved in the open market.
Commercial leases in England and Wales have traditionally provided for ‘upwards only’ reviews, where the new rent negotiated cannot fall below the rent the tenant was paying before the rent review, even if market rents have fallen.
The Code for Leasing Business Premises has encouraged alternative forms of rent review mechanisms and it is becoming more common for rents to be reviewed in line with specified indices such as the Retail Prices Index (RPI).
How long is a tenant legally responsible under a commercial lease?
The answer depends upon when the lease was granted. For leases granted before 1996, the original tenant remains legally responsible for the rent and the other lease commitments for the duration of the term (even after it has sold its interest).
For leases granted after 1996, the position is different. The tenant ceases to be liable to the landlord for future breaches once it has sold (assigned) the lease. However, landlords can legally require the selling tenant to guarantee the new tenant’s lease obligations using a guarantee document known as an Authorised Guarantee Agreement or AGA. It is important, therefore, when selling leasehold property, that you are happy with ‘covenant’ strength of your buyer.
The law in this area is complex and still developing and it is important that you get legal advice regarding your on-going liabilities when selling (assigning) a lease.
Who is responsible for repairing and maintaining the property?
In most cases, the tenant will be responsible for keeping the property in good repair. If you are taking a lease of property which is not in a good state of repair when the lease is granted, you may find that you are legally obliged to remedy that disrepair. It is for this reason that we always advise that you obtain a survey. If disrepair is found before the lease is granted, it is possible to limit your liability by reference to an agreed schedule of condition which records the condition of the property at the start of the lease.
Landlords also expect the property to be regularly re-decorated and they may require carpets to be renewed and plant and equipment to be replaced. It is important for you to understand the extent of your repairing and redecoration obligations at the outset. Depending upon the nature of the property and the length of the lease, it may be possible to negotiate more limited repair/decoration liabilities.
What is a schedule of dilapidation?
If the tenant does not comply with its repair/decorating obligations, the landlord can serve a ‘schedule of dilapidations’ on the tenant. This requires the tenant to put the property back into a satisfactory state of repair. If the tenant does not carry out the work, the landlord can pursue a legal claim against the tenant for breach of the lease.
Disagreements over dilapidation claims are frequent and the law is complex so expert advice is recommended.
Will I have to pay a service charge?
In multi-occupied buildings with common areas, the landlord will normally repair and maintain the structure and common areas of the property (eg entrance halls, service yards, stairs etc). However, the landlord will expect to recover the full cost of such repair/maintenance from the tenant by way of a service charge. If the landlord provides services to the tenant (eg heating and lighting a reception area, providing a lift service etc) these costs will also be recovered from the tenant via a service charge.
Service charges can represent a significant cost for business tenants and it is important that the service charge provisions in the lease are carefully drafted and negotiated and to ensure that the tenants’ liabilities are appropriate for the property being leased.
When negotiating a new lease, it may be possible to limit your service charge exposure by negotiating a service charge cap.
What if I want to sell my interest in the lease or deal with the lease in another way?
Business leases normally restrict the tenants’ ability to deal with the lease. Often a tenant will not be able to sell (assign), sub-let, share occupation or grant security over the lease unless the landlord’s consent to the transaction is obtained. Landlords also impose conditions which have to be met before such consent will be granted.
Careful drafting and negotiation is required to ensure that these lease provisions (known as alienation covenants) are not too restrictive and allow the tenant enough flexibility to deal with the lease should their business requirements change.
Are there usually restrictions on how I can use the property?
Yes. Landlords will usually restrict how the property can be used. The lease will specify a ‘permitted use’, often by reference to a planning class (eg B1 offices). Sometimes the use will be very specific to ensure that there is proper mix of businesses within the landlord’s development.
It is important to ensure that the permitted use specified in the lease is clear and wide enough for your purposes.
Can I alter the leased property?
The answer depends upon what the lease says and the nature of the works you want to carry out. Leases normally control the alterations that a tenant can carry out. Generally the shorter the lease the less the tenant will be able to do.
Various types of alterations are usually dealt with in the lease as follows:
- Structural alterations – the tenant will not normally be able to undertake these
- External alterations – the tenant will not normally be able to undertake these
- Non-structural internal alterations – the tenant will be permitted to carry these out subject to getting the landlord’s consent (which it cannot unreasonably withhold or delay)
- Non-structural partitioning – the tenant should be able to erect and remove non-structural partitioning without the landlord’s consent (but may need to notify the landlord of what has been done).
How is landlord’s consent to alterations normally given?
Landlord’s consent is usually given by a formal deed (known as a licence to alter) requiring the tenant to:
- comply with various building requirements when carrying out the works
- insure the works
- remove the works when the lease ends.
The document will need to be negotiated if you do not want to remove all or part of the works at the end of the term. It should also specify whether the works should be taken into account on rent review (this should not normally be the case where the tenant has paid for the works).
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