Taking on a commercial lease is significant financial commitment for most businesses. However it is an essential as most businesses will need premises to run their business from.
A lease is essentially a contract between the landlord and the tenant that gives the tenant the exclusive right to occupy and use the landlord's property for a period of time.
The lease will impose obligations on both parties which on the face of it may appear to be acceptable, but could amount to substantial future expenses. For this reason it is important that both landlord and tenant seek legal advice before a lease is entered into so that your Solicitor can advise you on your obligations under the lease and help you negotiate fair terms and conditions.
Some of the terms in most commercial leases are considered below.
Rent and Rent Review
The rent payable under the lease is usually what both the landlord and tenant will think about first. It is advisable for both parties to have a valuation carried out by a qualified surveyor to assess the true rental value of the property before an agreement is reached. This way both parties can be sure that they are getting/paying a fair rent for the property.
It may be agreed that the rent is reviewed during the life time of the lease. There are various options for the methods of reviewing the rent. The most common rent review methods are reviews by way of the “market rent” at the time of the review or by reference to an index, typically the Retail Price Index.
There are various other rent review options available and both landlord and tenant should seek legal advice before agreeing on a rent review method.
In addition to the rent, the tenant may have to pay VAT on the rent, insurance rent and service charges.
Term
Generally, a business lease is granted for a fixed period starting and ending on fixed dates.
It is important to be aware of when the fixed term will end and whether it can be terminated earlier by either party. The right to terminate early is usually referred to as a break right.
If the lease is a "business lease" under the LTA 1954 the tenant has certain rights to renew the lease at the end of the contractual term. If the landlord wants to oppose a renewal of the lease then he will have to prove certain grounds if he is to be successful in obtaining possession of the property from the tenant.
It may be agreed that the lease is to contracted out of the Landlord and Tenant Act 1954 (LTA 1954). If the lease is contracted out of the LTA 1954 then it will finish at the end of the term and the property must be vacated.
If the lease is not contracted out of the LTA 1954 it will continue until the lease has been properly terminated or renewed and until then the tenant will have the right to remain in the property.
Use
The lease will generally stipulate how the demised property may be used.
Whatever the permitted use under the lease, there must be planning permission for the actual use and the tenant should consider whether planning permission for change of use will be required.
Insurance
It is usual that the landlord will insure the property and the tenant is required to pay a proportion of the premium covering the area let to the tenant.
It is important that one party is obliged to insure the property so that problems of double insurance and no insurance are avoided.
The insurance clause needs to be read carefully and in conjunction with each party's repairing obligations.
Repairs
Usually, there will be repairing obligations on the tenant. There may also be repairing obligations on the landlord, depending on the situation.
If the tenant is required to "keep" the property in repair, it must put the property into a good state of repair, even if it was not in a good state of repair at the date of the grant of the lease. Therefore the tenant may want to consider limiting the repair obligation according to a schedule of condition attached to the lease. A schedule of condition is a schedule of photographs evidencing the state of repair of the property at the date the lease is entered into.
If the property is part of a larger property, the tenant needs to make sure that the landlord is obliged to repair the parts that are not part of the tenant’s property.
Rights, exceptions and reservations
A lease will some grant the tenant rights over property that is outside the tenant's property, but still forms part of the landlord's property. For example, if the tenant has a lease over a floor in an office, it will require rights to use the stairs, lifts and entrance hall so that it can get access to and from its premises.
The lease will usually grant rights to the landlord over the property demised to the tenant. For example, the lease may give the landlord the right to go onto the tenant's demised property to carry out repairs.
Assignment and underletting
If the tenant wants to sell its interest in the lease, the sale is referred to as an "assignment". If the tenant wants to keep its interest in the lease, but allow someone else to use the demised property or part of it, the tenant could grant an underlease (also called a sublease).
There are likely to be a number of restrictions associated with assignment and underletting. Generally, the tenant will require the landlord's consent to the grant of an assignment or an underlease.
The above list is not exhaustive and is simply an overview of some of the terms that parties may want to consider before taking on new lease. The Code for Leasing Business Premises in England and Wales 2007 provides a model heads of terms setting out the terms that needs to be considered and can be found here.
Please note that this is not a substitute for legal advice and is only intended as a short informative note of some of the things to consider when taking on or granting a new lease.
Ramsdens experienced commercial property team can act for either landlord or tenant and have experience in dealing with a wide range of different types of properties.