The Commercial Property team has particular expertise in acting for either Landlord or Tenant in dealing with Leases of all types of commercial property on a national basis. Please be wary of granting or accepting a Lease without having obtained the proper legal advice. Leases are usually far more complex than transfers of freehold property, and the repercussions of not fully understanding ones obligations can be very costly.
We have highlighted below a few of the key issues which parties to a Lease should understand when negotiating terms:
The length of the term
During the past fifteen years (and with the exception of Leases of licensed premises) the tendency has been for Tenants to seek Leases for shorter terms (10 or 15 years or less) than was previously the case.
We will advise both Landlord and Tenant of the desirability of long or short terms, and also on the circumstances in which the Tenant, by virtue of the renewal provisions of the Landlord and Tenant Act 1954, can insist on his Landlord granting him a renewal Lease at the end of the current term, and likewise the grounds on which a Landlord is entitled to decline to grant such a Renewal Lease.
Rent and rent reviews
We advise both Landlord and Tenant to obtain professional advice to establish the fair rent for the premises (bearing in mind the repairing obligations of the parties). Normally reviews will be negotiated every three or five years during the term. Rent review clauses in Leases are lengthy and detailed and need very careful consideration by reason of their complexity.
Whether a Lease should contain an 'option to determine' i.e. whether the Landlord or Tenant should be entitled to break the Lease at some point during the term. Break clauses are frequently negotiated on behalf of Tenants, who are now inclined to be in a stronger negotiating position than was the case 10 or more years ago. Additionally, it is essential for both Landlord and Tenant to consider whether a break clause should be conditional on, for example, the payment of rent and/or the observance of the tenant's covenants. An onerous condition may result in a Tenant who has a break clause not, in practice, being able to rely on it, and the Tenant in particular needs careful advice in this regard.
Obligation to Repair
It is particularly important for the Tenant to understand the extent of his obligation as to repair, be it an internal repairing liability, a full repairing liability and/or a liability to refund to the Landlord a proportion of the costs incurred by the Landlord in repairing the building of which the premises form part.
We can advise on the following issues that a Landlord or Tenant may wish to clarify in respect of repairing obligations in their lease:
- Can the Landlord insist that the Tenant is not only obliged to maintain the building in good repair, but also to rebuild, if part of the building becomes beyond economic repair?
- Does a Tenant with an internal repairing liability have to repair external doors and window frames?
- Does a Tenant with a full repairing liability have to take on responsibility for an inherent defect in the building resulting from the design faults when the building was constructed 10 years earlier?
- Where a Landlord is, by virtue of the terms of a Lease, entitled to recover the cost of effecting repairs to the building through a Service Charge, what protection does the Tenant have in respect of the extent of such building works and the cost of them?
Assignment or Sub-letting
In settling the terms for a commercial lease, the Landlord and Tenant should understand and consider the following matters:
- What alienation rights should be granted to the Tenant to enable him to dispose of his leasehold interest in the premises by way of an Assignment or Sub-Lease?
- What are the considerations when deciding whether a right to Assign or Sub-Let should only be in respect of the whole of the premises as opposed to part of the premises?
- Under what circumstances can a Landlord properly refuse his consent to a request by the Tenant to be able to Assign or Sub-Let?
- What conditions can a Landlord properly attach to his consent to an application for consent to Assign or Underlet?
- What is the Tenant's liability if the person to whom he assigns the Lease (the Assignee) defaults or if any subsequent Assignee defaults?
- What is an "Authorised Guarantee Agreement" and why is it so important for both Landlord and Tenant?
A well advised Landlord will wish to keep absolute control over the structure of the building, and a well drawn Lease will normally provide for the benefit of the Landlord that a Tenant is not entitled to make structural alterations.
On the other hand, a Tenant must consider whether he might, either at the beginning of, or during the term, wish or need to make structural alterations, and if so he should press for the Lease to permit this, (subject to obtaining the Landlord's prior consent). It is also essential for a Tenant to have any fitting out alterations, structural or otherwise, approved before the Lease commences, so that he can absolutely sure that the Landlord does not unexpectedly raise objections once the Lease has been completed. Often there will be a need for a formal Licence for Alterations, the drafting of which will require detailed consideration.
A Lease should state how a Tenant's improvements are to be dealt with when the rent is reviewed, especially if the Tenant carries out extensive fitting out works. Under what circumstances is the Landlord able to in effect "rentalise" improvements, and to what extent and in what circumstances is the Tenant able to ensure that any improvements he carries out are not taken into account when rent is reviewed.
The authorised user of the premises
The Landlord will wish to ensure that the "User" provisions in a Lease prevents a Tenant from changing its use to one which attracts a lower rental value than the use the Landlord intends. A well advised Tenant will also wish to make sure that the user provisions in the Lease allow him as much flexibility as is reasonable, so that if he has to assign the Lease, he is not unduly limited when the premises are marketed as to the type of business which the User provisions in the Lease allow to be carried on.
In addition, it is of particular importance to the Commercial Landlord or Tenant to have a full understanding of the need for and the effect of the formal Notices required in connection with Leases. These Notices govern the termination and renewal of Leases, the operation of Break Clauses, the operation of Rent Review provisions in Leases, and Repair and Dilapidation Notices in particular. Failure to serve or deal with Notices within the relevant time limits can result in severe consequences.