If you are considering entering into a commercial lease, it is vital to take advice from a specialist, experienced commercial lease solicitor. Business leases contain many obligations and responsibilities; whether you are a landlord or a tenant, you need to fully understand the implications of what you are signing up to.
Making a mistake when taking on a commercial lease can be very expensive. As a tenant, unless your lease is an extremely short one, you cannot simply give notice and walk away. You are likely to be liable to pay the rent for many years. You could also be liable for expensive repairs and maintenance.
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How our commercial property solicitors can help you
Our team regularly provide legal advice on commercial lease matters to landlords and tenants in a full range of issues, including:
· Advice on commercial use
· Advice on security of tenure
· Agreeing on the terms of the lease
· Commercial lease subletting and assigning
· Commercial property disputes
· Licence for alterations
· Negotiating heads of terms
· Rent reviews
· Variation of a commercial lease
Below are some main issues to consider before entering into a commercial lease.
Ensure you have the right commercial use
The first point to check as a potential tenant is that the property you are interested in has the right commercial use class for your needs. The Town and Country Planning (Use Classes) Order 1987 has fifteen different categories of commercial use. When you find a property to lease, you must check the class of business permitted. These include:
· Class A – shops, financial services, restaurants, cafés and pubs
· Class B – business, general industrial use and storage or distribution
· Class C – hotels, residential institutions, dwelling houses
· Class D – non-residential institutions, places for assembly and leisure
If you want to use the premises for a different class of use, you may need planning permission unless the change will be temporary and for less than two years.
You will also need to check with your potential landlord that they are agreeable for you to apply, particularly if any changes to the building will be required.
Your commercial lease – negotiating heads of terms
Before entering your commercial lease agreement, it’s often a good idea if you and the other party can negotiate and sign heads of terms. This lists the key terms that you have agreed on.
Heads of terms can prove really useful. In essence, it’s a document setting out the key terms of your agreement at the negotiation or ‘pre-contract’ stage. Amongst the benefits of these kind of agreements are following:
- they could save you legal costs, as they avoid the need for both parties solicitors to spend correspondence confirming the basic commercial terms agreed by the parties. That in turn can speed up the transaction.
- they clarify matters – and can save time and potentially legal costs by clearly setting out the basic agreed terms – so there’s no misunderstanding
You can also include a timescale for signing the lease.
Heads of terms are not legally binding (though it’s always sensible to include the phrase “subject to contract” in the agreement.
Sometimes, the landlord’s surveyor will prepare the draft heads of terms. But given that they are not binding, and unless the lease is a very expensive one, the parties, if they have sufficient experience, often draft them themselves. Solicitors for the landlord and tenant can then negotiate these as necessary.
Agreeing the terms of your lease
Once the heads of terms are signed, it’s then usually left to the landlord’s solicitor to draft the lease. Key terms and conditions usually include the following:
· Break clause, allowing either party to end the lease early and the process for this
· The level of rent and when it should be paid
· Repairing and insuring obligations
· Service charges, including whether these are capped
· The length of the lease
· The process for reviewing the rent
· Use of the premises
· Whether alterations will be permitted
· Whether assignment or sub-letting are allowed and, if so, how this will be done
· Whether the lease will give security of tenure
While the heads of terms may deal with many of these points, there may still need to be some negotiations.
Having an experienced commercial lease solicitor to represent you is important. Some of the clauses can leave business tenants, in particular, with significant future obligations. And that’s why you need sound legal advice. For example, as a tenant, you may be agreeing to stump up for major repairs needed to the property, such as a new roof. Your solicitor will be able to take steps to avoid this, but it is essential to limit this type of liability as far as possible.
Due diligence before signing your lease
Both you and your solicitor will need to carry out due diligence work before the lease is signed. This will include the following:
· Engaging a surveyor to confirm the value of the property
· Asking the surveyor to prepare a schedule of condition
· Checking the correct planning consents are in place and that you will be able to use the property in the way that you want
· Checking the legal title to the property
· Checking the buildings insurance policy if the landlord provides insurance
· Going through the proposed clauses in the lease with you to check that you fully understand your obligations and whether the lease, as drafted, meets your needs as a tenant
Getting the right advice on security of tenure
Landlords will need to consider whether to provide security of tenure to the tenant. This is a statutory right for a tenant to renew the lease at the end of the term. The right arises automatically under the Landlord and Tenant Act 1954. It is possible to contract out of security of tenure, however. If the the plan is for tenant to have no security of tenure, then this must be clearly stated in the lease.
We can discuss the options open to you and whether security of tenure is right for you. In contrast, as a landlord, you may want to avoid giving a tenant security of tenure so that you have greater control over your property, and in particular the possibility of taking occupation at the end of the lease.
Commercial lease subletting and assignment
If you are a tenant and no longer want to rent the property, you may be able to sublet or assign it. This depends on the terms of your lease.
Subletting occurs where the tenant enters a sublease with another party for all or part of the premises. When subletting, the original tenant remains liable to the landlord under the terms of the original lease.
Assignment of a lease involves transferring the lease to a third party. This can be a better option for a tenant who wants no further involvement with the property. However, the landlord may insist that the tenant guarantees that the rent will be paid. That’s because that kind of guarantee means that if the new tenant fails to pay, the original tenant will be liable.
If your lease allows subletting and assignment, the landlord is not able to unreasonably withhold their consent.
When a lease is due for renewal, you may prefer to renegotiate the terms. If you are a tenant with security of tenure, then the landlord cannot insist on significant changes in the terms and conditions.
And if you can’t agree on the right level of rent going forward, you might look to get an independent third-party market valuation as the basis for negotiations.
If the tenant does not have security of tenure, then negotiations tend to be more open.
Licence for alterations
Your lease should set out the process if a tenant wishes to make alterations to the property. This generally requires the landlord’s consent.
A commercial property solicitor will normally draft the terms of the licence for alterations, make sure that the parties are protected as far as possible. For example, the landlord needs certainty that the tenant will be responsible for making good any damage incurred in any alterations, while the tenant needs confirmation that altering the building won’t be a breach of the lease.
Variation of a commercial lease
Often, when a lease has been in place for years, situations change and both landlord and tenant may want to alter the terms. There are a number of ways to do this– variation, supplemental or additional lease (which leaves the original lease still in place) or granting a new lease with amended terms.
Make sure you get expert advice before signing a deed of variation. For example, there might be a risk that you find yourself with unexpected changes to the lease if your lease variation is considered to be a surrender and re-grant of the lease and is not dealt with correctly.
Surrendering a commercial lease
If a tenant wishes to leave the premises, they may be able to negotiate a surrender of the lease with the landlord. It may be possible to use a break clause to end the lease, otherwise the landlord’s consent is needed. (A break clause is a common cause and leases allowing the tenant to surrender the lease without costs at certain pre-agreed stages).
A deed of surrender, signed by both parties, may be required to end the tenancy.
The parties to a commercial property lease can sometimes be considered to have surrendered that lease has ended e.g. if the tenant returns the keys to the landlord and the landlord lets the property out to another tenant, the lease is assumed to be at an end.
This is a less certain process and could expose the tenant and/or the landlord to unexpected liabilities. So, if you are thinking of ending a commercial lease, make sure you get good legal advice from an experienced solicitor in advance.
Your commercial lease and rent reviews
Longer commercial leases will usually have rent reviews lined up to take place at the time specified in the lease. The lease will also give details on how to calculate the new rent. For example, rent may be index-linked to the Retail Price Index, based on open market rents or be a fixed increase.
You may be able to negotiate the new rent. Key points usually considered include:
· The rent charged on similar properties in the area
· The condition of the property
· The location of the property
· The amenities included
A landlord cannot simply increase the rent as they see fit. If you cannot reach an agreement, a well drafted lease should out how the dispute will be resolved – often by instructing a surveyor to prepare a valuation or asking an arbitrator to make a ruling.
A commercial property lease usually passes responsibility for maintenance of the building to the tenant. Many leases are what is referred to as “fully repairing leases” – and at the very least are likely to state that the tenant must keep the property in good repair and condition. At the end of the tenancy, the tenant must hand the property back in good condition.
If that’s the case, then the landlord is within their rights to insist that the tenant pay for any necessary repairs or updating maintenance. It’s possible that might be true even if the property was in poor condition when the tenant took it over.
For this reason, it is crucial that a tenant has a schedule of condition prepared before the lease is signed – this keeps a clear record of the level of maintenance building when the lease commences. Plenty of photographs to back up any written description of the state of the building are always a good idea.
A surveyor with plenty of experience with dilapidations is often the right person to draw this up. Although if the building is a small one and the rent is relatively low, it’s not unusual for landlord and tenant to compile their own list with photographs.
If you do prepare a schedule of condition, then it’s normal for the landlord to agree to its contents and it is then attached to the lease. So, when handing back the property, the tenant will not then have to put it back into a better state than it was at the start of the lease.
At the end or shortly before the end of the lease, the landlord will usually list the work that they expect to the tenant to do in what is known as a “schedule of dilapidations.” A surveyor will usually prepare the schedule. Check the lease – it’s not unusual for the cost of preparing the landlords dilapidations claim to be landed on the tenant.
It’s common for the tenant to disagree to some extent with that schedule of dilapidations. To be frank it’s not unusual for surveyors to maximise the work that needs covering in terms of dilapidations – and their estimate of the cost of repairs won’t be the cheapest. Depending on the value of the lease and the sum claimed in any schedule of dilapidations, it may be necessary for the tenant to get their own surveyor involved to try to negotiate down the dilapidations figure.
Equally it’s not unusual for some form of compromise to take place whereby the outgoing tenant agrees to pay a lump-sum and the landlord take back responsibility for repairs and maintenance.
But if the dilapidations claim is a large one and is ultimately no agreement between both parties, then the issue may need to go through some form of alternative dispute resolution – usually arbitration or the Dispute Resolution Service run by the surveyors’ governing body, RICS ( it is actually the world’s oldest property related alternative dispute resolution service).
Commercial property disputes
Commercial leases are complex and there is wide scope for disputes. If you are involved in a commercial lease dispute with your landlord or tenant, you should speak to an experienced commercial lease solicitor as soon as possible.
If you ask us to represent you, we can intervene on your behalf to try and resolve the problem before the situation escalates.
We can write to the other side setting out your legal position. Where necessary, we will negotiate robustly on your behalf.
If an agreement cannot be found, then we will prepare a strong case to be heard by an arbitrator or dealt with in another form of alternative dispute resolution. If at all possible we will try to keep the matter away from the courts – because legal costs in these kind of property disputes can quickly rise, and few people want to get involved in the unnecessary stress of a drawn out court battle.
Dealing with a disagreement early on usually means that it’s more likely to be resolved relatively quickly and without racking up huge legal bill.
Click here to read more about how our team can help you with commercial property disputes.