Commercial Leases: what are they are and what do the terms mean?
Posted on 20th January 2020
The start, extension or continuation of a business may mean that you decide to look for a new business premises. If you do make this decision, it is important to know what you are signing up for before embarking on a new Lease.
Any Commercial Property Solicitor will tell you that the Lease of a business premises is the contractual document which gives a Tenant the right to occupy a property and sets out the terms and conditions the occupation of the occupation is subject to.
Here are the important points to consider when reading the Lease: -
The term is the length of the Lease. 3 years, 5 years, or, like the famous Guinness Lease for a term of 9000 years, signed by Arthur Guinness in 1759, it is important to consider what you want. Are you a new business just starting out, do you want a short Lease, with flexibility? Flexibility will enable to you to try to location of the property you intend to Lease, a high street location may assist in attracting foot traffic if that is your intended audience whereas an industrial unit maybe preferred if you intend to use an area for an office and storage. Flexibility will give you the opportunity to expand or reallocate in the future. Whereas a longer lease will give you greater certainty if you intend to spend a lot of money refitting the space. It is important to remember that the term of a Lease will affect the amount of stamp duty payable.
The security of tenure provisions in the Landlord and Tenant Act 1954 give most business tenants an automatic right to a new Lease at the end of the term and the Landlord will only be able to refuse this right on a limited number of grounds. However, the parties can ‘contract out’ of these provisions it is common for shorter leases to be “contracted out” of the Landlord and Tenant Act as it gives them more control at the end of the Lease. You should be wary before contracting out of such a valuable right. If you find a perfect spot for your business you will probably want to continue trade from a premises where your Clients know where to find you, so you may want to ensure that your Lease can continue after the term ends! We the Lease has the provisions to contract out the Landlord must serve a notice on you and you will need to make a declaration to confirm that you are aware of the circumstances of contracting out of the lease. The reason you are asked to sign such a declaration is because it is important that you fully understand what you are contracting out of.
Break Clause –
A break clause allows you or the Landlord (or both of you) an opportunity to end the Lease before the end of Term. The Landlord may wish to enable a break clause if you are not 100% compliance with the terms contained within the Lease. You may also wish for there to be a break clause if you think you may need to get out of the Lease before the end of the term for example if you open a butchers shop in a vegan shopping centre, you’re business may not be very successful, you may need to shut up shop before the term comes to an end. Conveyancing Solicitors are aware that recent case law has acknowledged that it is impossible to be 100% compliant with the Lease nonetheless the if the break clause states that you must be compliant with the terms of the Lease then you should attempt to adhere to the Lease as far as possible so that the Landlord doesn’t feel inclined to enact the clause.
Rent and Rent Review –
Obviously, it is important to be aware of what the Rent is, but you should also be wary of whether VAT will be charged on the rent. If a rent-free period has been agreed, then you should be sure that there are clear terms allowing for the same.
In a longer lease you may see the term “rent review”. If you see this term you need to look out for the changes that the landlord is being allowed to make as it usually gives provision for the Landlord to increase the initial rent. These changes may occur after an agreed period of time, by incremental increases, by open market valuations or inline with the retail prices index.
Service Charge –
Often a lease may be for a part of a building not for the whole of a building. In these instances, you may be required to make payment towards the services for the property for example a contribution to the lights, heating, maintenance or repair. The landlord may allow for a service charge within the Lease requiring you to contribute towards the same. You should ensure that your budget allows you to be able to contribute towards this. It is always a good idea to check whether certain areas require repair or urgent maintenance; you don’t want to sign up for a lease then be stung by urgent lift repairs. It is also recommended that you look at previous year’s accounts, so you have an idea of previous years charges.
Permitted Use –
Check what you’re allowed to use the property for. If you take a lease on with a permitted use which allows an office but not a restaurant and you plan to open a restaurant you may run in to trouble. Ensure that the permitted use allowed is wide enough to cover your business needs. You can check the class of permitted use on your local councils’ website. For the permitted use, please see the link to the Planning Portal here.
When taking on a commercial lease you will probably be taking on an obligation to be responsible for maintaining and repairing the property. As is becoming a common theme within this blog though; you must check exactly what you are becoming responsible for. A repair obligation may ask you to put the property in to a good state of repair even though the property was in a poor state of repair at the beginning of the Lease which may become very costly for you. Be sure to inspect the property and obtain a survey before entering into an obligation to repair. If possible try to negotiate your lease to limit the repair obligation to a Schedule of Condition (i.e take picture of it and make a lease which states that you do not have to put the property into any better condition than that which is evidenced at the beginning of the Lease).
So, you decide to refit the premises which is suitable for your business. If the lease states that you must obtain consent from the Landlord before carrying out works or alterations, then you will need to be prepared to be able to show the Landlord specifications and plans showing the proposed works before stating them. An alteration clause may also have a requirement to reinstate the property to the original configuration before the end of the term; make sure you are prepared to undo all your hard work!
Its standard practice for the Landlord to insure the property and the Tenant to reimburse the insurance costs. Always ask to see a copy of the insurance schedule!
Dealings with the Lease –
If you decide to move before your term is up often you can rely on a break clause but if your Landlord does not agree to a break clause then you need to make sure that you can at the very least sublet the property to someone else. The Landlord will usually have strict provisions when it comes to subletting’s but at least it will give you a way out of the Lease!
Commercial Leases are complex so make sure you take legal advice from experienced property lawyers before signing! By ensuring that the Lease fits your business needs you are less likely to have problems in the future.
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