The Coronavirus pandemic starkly illustrates how reliant commercial landlords and tenants are on each other and the importance of maintaining a positive working relationship. As a tenant, understanding the responsibilities of both you and your landlord and your legal rights will ensure that you have the knowledge needed to protect your best interests. Your commercial tenancy must support your business as it grows, and changes, and experienced Commercial Lease Agreement Solicitors can partner with you to achieve this aim.
Need specialist Commercial Lease Solicitors? Call us on FREEPHONE 0800 1404544. Initial legal advice on the phone is always FREE.
What is a commercial lease?
A commercial lease is an agreement between the owner of premises, known as the landlord, and a person or company wishing to occupy that premises in exchange for paying rent. The details of the arrangement are laid down in a lease agreement, drawn up by a commercial property Solicitor.
Landlords can be individuals; however, normally, especially in large cities such as London and Manchester, they are corporate entities who own a large portfolio of properties.
Aside from wages, your commercial lease is likely to be your biggest overhead, therefore it is important to negotiate the terms, especially concerning rent reviews and break clauses.
Commercial leases are different from residential leases in that the latter refers to a tenancy between a landlord and a person/family living in the premises. However, a commercial lease can have a residential element in cases where the business owner “lives above the shop”. This is known as a mixed lease.
Is there a standard form for a commercial lease agreement?
Unlike Assured Shorthold Tenancies, which are routinely used for renting out residential property, there is no standard format for a commercial lease. That’s because every business is different.
What’s more, commercial premises themselves can differ considerably, ranging from retail space, warehouses and factories to manufacturing plants and offices. And these type of lease agreements can cover individual buildings or parts of larger blocks.
However, several clauses will feature in most commercial lease agreements, including the following:
· Name and details of the landlord and tenant.
· Address of the property to be leased.
· Rent payable and when it is due (usually quarterly).
· Details of rent reviews.
· Type of lease, i.e. full insurance and repair (see below).
· Covenants that come with the lease.
· Length of the lease.
There are several other clauses that may be included such as break clauses, steps to follow if there is a dispute, and rights relating to assignment and subletting. (A break clause is a provision in a lease which lets either the landlord or the tenant, or both, to terminate the lease early – normally at a fixed point or points in the term e.g. 5 and 10 years into a 15 year term).
Normally, the lease will be drafted by the landlord’s solicitor and will therefore be in the landlord’s favour. That’s why it’s not unusual for tenants to try and negotiate more advantageous terms. Much of your success will depend on the market – if there is a glut of commercial properties to rent, a landlord is likely to be more willing to negotiate.
What are Heads of Terms, and will I need them?
Heads of Terms (HoTs) refers to the main terms of a commercial lease as agreed by the landlord and tenant. They are usually put together by the commercial property agent and are used by the Solicitor to create the contract. HoTs are not legally binding, as evidenced by the liberal use of the term ‘subject to contract’.
However using Heads of Terms can be very useful – as a summary of the principal points of what’s been agreed, which will form the basis of the business lease.
Do I really need a solicitor when entering a commercial lease agreement?
Technically no – but it’s like residential conveyancing. You can do your own conveyancing, but no one does, unless they know exactly what they’re doing.
However, unfortunately many commercial tenants make the mistake of not taking professional legal advice before agreeing to HoTs. Negotiations after this stage become costly and you may well find yourself with little room to manoeuvre.
As with all negotiations, you are at your most powerful at the beginning of the discussions. Talking to a Commercial Property Solicitor an early stage will ensure you can take advantage of that leverage you have before the tenancy agreement is drawn up.
What are the most common types of commercial leases?
There are several common types of commercial lease agreements, including:
• Full-Service Lease – the landlord pays all the operating costs and taxes, and the tenant is responsible for the rent.
• Single Net Lease – the tenant agrees to pay both rent and any property taxes applicable to the premises. The landlord pays all other operating costs.
• Double Net Lease – Although the landlord is still responsible for the cost of maintenance and utilities, the tenant pays rent, property taxes, and their share of insurance premiums.
• Triple Net Lease – The tenant is responsible for all costs associated with the property plus rent.
What are the five key points a tenant entering into a commercial lease agreement must consider?
There are several factors you must consider when entering into a business tenancy. Not getting these right could negatively affect your business in terms of agility and ability to grow/scale.
1. The length of term – commercial leases are usually granted for five, ten, fifteen, or twenty-five years, although there is no legal minimum or maximum. For example, a lease can be granted for 999 years. You need to consider what length of lease is right for your business and will best support your short, medium, and long-term strategy.
2. Break clauses – a break clause allows either you or the landlord to end the lease early on a certain date or after a particular ‘trigger’ event. It is vital that you have break clauses inserted in your lease as they provide the flexibility that all businesses require in these fast-changing times.
3. Fully repairing lease – A Full Repairing and Insuring Lease or FRI means that you are responsible for all the repairs and insurance of the premises. What catches tenants out is that an FRI lease requires the tenant to hand the property back in good repair even if it was a complete wreck when you signed the lease. Do not sign an FRI lease without receiving professional legal advice.
(See below for an explanation of what are referred to as “Dilapidations”)
4. Rent reviews – your commercial tenancy agreement is likely to contain provisions for the amount of rent you pay to be reviewed. There are three main types of rent review methods to consider:
• Open-market – where a surveyor will examine the amount of rent being received from similar properties on the market and parties can negotiate an upward increase based on their findings. Note – open market rent reviews only result in the rent going up. Unless your landlord is extraordinarily generous, if rent values drop, your rent will remain the same.
• Retail Price Index – the rent increase is kept in line with inflation.
• Turnover – your rent is based on your turnover (not profit). This option is becoming increasingly popular, especially in the retail sector.
5. Assignment and sub-letting – the right to assign your lease to another tenant or in sub-letting part of the premises can provide flexibility in tough economic times. However, in both cases, you will need to ask the landlord’s permission (although they or it cannot unreasonably deny it) and you may still be responsible for aspects of the new tenancy.
Do I have the right to renew my commercial lease agreement automatically?
If your lease is protected, you will have the right to automatically renew it on the same terms (except for rent). This is known as Security of Tenure and is governed by the Landlord and Tenant Act 1954. Although the landlord can oppose the renewal, they can only do so on limited statutory grounds, for example, they wish to redevelop the premises, or you have breached a covenant. The most common breaches of covenant will involve non-payment or late payment of rent).
Your landlord may be keen for you to contract out of the security of tenure protections. To do this they must notify you in writing setting out the consequences of contracting out. You should also receive independent legal advice and sign a statutory declaration that you understand and accept the risks of contracting out of the security of tenure provisions.
Can I negotiate the rent on a commercial property?
It may well be possible to negotiate your rent, especially if there are a lot of commercial properties available in your area. Your Commercial Property Solicitor will look over the proposed terms of your commercial lease agreement and the rent amount. They may advise that you request an independent rent valuation as this could support your case if you believe the rent being asked is excessive.
What are the definitions of the premises in the lease?
There are three main parts of a premise defined in a commercial lease, namely:
· Fixtures – something that is ‘fixed’ to the property such as light fittings or radiators. To qualify as a fixture the Court will examine whether the object is meant to be fixed permanently and the damage it would cause to remove it.
Tenants often add fixtures to the premises, for example, alarm fittings. You must remove any fixtures within the time specified in the lease or else you will be seen to have abandoned the object and it will become the landlord’s property.
· Chattels – a moveable object. Most fixtures start as chattels, for example, an alarm system on its own can be moved. However, it becomes a fixture once it is attached to the wall. Your landlord should provide you with a list of chattels at the start of your tenancy and you must ensure that these are left (or replaced if they have been damaged) when you leave.
· Leasehold improvements – refer to improvements made by the tenant at their expense during the term of the lease. Such improvements usually become the property of the landlord at the end of the tenancy unless they can be removed without causing damage. Examples include built-in cabinets and shelving, additions to plumbing and wiring, and carpets and tiles. Leasehold improvements are assets whilst you have the tenancy, therefore, your accountant must account for them and any depreciation on your balance sheet.
Will a lease limit my use of the building?
Your tenancy agreement will likely restrict how you can use the premises. The user clause will set out what you can and cannot use the premises for, for example:
• Positively: “The Tenant shall use the Property for the [Permitted Use].”
• Negatively: “The Tenant shall not use the Property for any purpose other than the [Permitted Use]”.
• The use of the premises may be stated with reference to the Town and Country Planning (Use Classes) Order 1987 (Use Classes Order), for example:
• “Permitted Use: [use as offices within Use Class [E(g) OR E(c)] of the Town and Country Planning (Use Classes) Order 1987 (as it applies in England at the date this lease is granted).
Can a commercial lease agreement be verbal and not recorded in writing?
Like all contracts, a commercial tenancy can be agreed upon verbally. However, oral agreements of any sort in the business world are a sure-fire way to end up in a dispute. And the big problem is that even if there is clearly an oral contract, it can be extremely difficult to prove detailed terms.
Although most verbally agreed tenancies are periodic, with the length determined by the frequency of rent payments, you may still be protected by Security of Tenure.
Will the landlord charge a deposit?
Some landlords will charge a deposit as security that you will perform the covenants under the lease. The deposit is separate from the first payment of rent and is often valued at three months’ rent.
Landlords are more likely to ask for a deposit if you are a start-up with no track history of leasing a commercial premise or if your business is in financial trouble. But there are other ways of satisfying the landlord that you are a safe and reliable tenant. And one of the simplest and most popular ways is a letter from your commercial bankers, confirming you are good for the rent.
If the deposit is taken, we would highly recommend that the rent deposit is held in a separate bank account in a different financial institution from your landlord’s main bank. The account should be in both you and your landlord’s name. This will protect the funds should the landlord become insolvent.
Do I have to pay a service charge?
A service charge is a charge levied by the landlord which allows them to recoup their running costs from the tenant. They are especially applicable in buildings that house multiple offices and/or retail businesses. The provision for a basic service charge in a commercial lease agreement will state:
· The types of services covered by the charge.
· How much the charge will be.
· The landlord’s obligation to provide the services.
· How the service charge account will be operated.
Service charges are a common cause of landlord and tenant disputes. Tenants are often reluctant to pay, especially if a large charge is made when they only have a short time left on their tenancy. In Fluor Daniel Properties Ltd and others v Shortlands Investments Ltd  EWHC 705 (Ch), the Court said that, if the landlord were to act reasonably, it would have regard to the length of the commercial leases when proposing a service charge for maintenance.
If you are unprepared to pay a service charge, speak to a Commercial Property Solicitor who can advise you on your legal rights.
Can I alter or improve the leased premises?
Most modern leases include covenants relating to alterations by the tenant. Should the tenancy agreement be silent regarding alterations, you can alter as you please providing you:
· Do not commit waste – defined as “a spoil or destruction to houses, gardens, trees, or other corporeal hereditaments, to the injury of the reversion of inheritance” (Mancetter Developments Ltd v Garmanson Ltd & Anor  EWCA Civ 2
· Keep the alterations within the boundaries of the property you lease.
If your lease does cover alterations, your ability to do work on the property will depend on the type of premise you are leasing and the level of control your landlord wishes to maintain. Normally, non-structural alterations to the interior are permitted, provided the landlord has given consent (which cannot be unreasonably withheld).
What are dilapidations?
Dilapidations refers to work the tenant must complete (or pay to have carried out) at the end of the term to bring it back to the standard required in the lease. It may include repairs to the property, decoration, or completing work to make sure the property complies with current legislation.
So if the building has not been adequately maintained or has fallen into disrepair, under the repairing covenant of the tenancy agreement you are required to carry out the necessary work.
If you do not fix items that require repairing, the landlord can arrange for the work to be carried out themselves. And if that happens, it’s likely to prove more expensive, because unlike you, the landlord has no incentive to keep costs down – because they’re not going to pay, you are.
And what’s more, depending on the lease, you may find that if completing those repairs or maintenance work means the property cannot be rented out for some time, you could be charged for the rent they could otherwise have received during that void period.
To protect your best interests, make sure you take ample photos of the premise before you take possession and have your Commercial Lease Agreement Solicitors explain your repair and maintenance obligations before signing the tenancy agreement.
Your commercial lease agreement – damage and forfeiture
If serious damage has occurred, your landlord may serve you with a section 146 notice and forfeit the tenancy.
Failure to comply with the repair and maintenance covenants in your lease could result in you not being able to exercise a break clause or your landlord resisting renewing your lease, even if it is protected under the Landlord and Tenant Act 1954.
Can a Landlord forfeit the lease and evict the tenant for non-payment of rent?
If you breach a covenant contained in your commercial lease agreement, your landlord can re-enter and take possession of the property either by peaceable re-entry or by applying to the Court. This is known as forfeiture.
Your landlord has no legal right to peaceable re-entry or to instigate forfeiture-related court proceedings for rent arrears unless they have serviced a section 146 notice setting out the details of the breach and requiring you to remedy it and pay compensation. Furthermore, forfeiture action is only enforceable if you do not remedy the breach within the time limit set out in the section 146 notice or within a reasonable time and/or fail to pay compensation to the landlord’s satisfaction.
You can apply to the Court for relief from forfeiture anytime whilst the landlord is proceeding with the process. If you receive a section 146 notice you must seek specialist commercial lease advice from an experienced property dispute Solicitor immediately.
Looking to get out of your commercial lease agreement?
Click here to read our tips on successful Commercial Lease Termination.
Or call our specialist Commercial Lease Agreement Solicitors on FREEPHONE 0800 1404544 for free no strings attached initial phone advice