Commercial Leases An Over View
The purpose of this brief is to provide you with an insight into the content of a commercial lease and the processes leading to its grant.
We set out below a summary of the principle considerations and steps encountered in the grant or taking of a commercial lease. A number of steps are required even before the lease itself if considered. You need to allow sufficient time for these steps to be taken before you agree a completion date.
It needs to be established that there is a planning permission for the property to be used for the purpose intended by the tenant. A Local Authority search will resolve this.
The landlord must have the authority to grant a lease in the terms proposed. If he does not own the freehold himself then the Head Landlord also has to approve the sub-lease. If the landlord has a mortgage, then his lender will also need to give its consent to the lease being granted.
The landlord and the tenant will both wish to make enquiries (for example by means of references, company searches, etc) as to the credit worthiness and financial stability of the other.
The tenant’s solicitor will ask questions of the landlord’s solicitor. These enquiries will deal with matters such as:-
It is important to do a search for “contaminated land”. If a previous user of the land has caused it to become polluted the occupier, and this may include a tenant, can become liable for the costs of cleaning up the site. The costs can be enormous. Checks can be made by undertaking suitable searches and enquiries of the landlord.
In terms of the lease itself, this of course needs careful consideration. The tendency is for parties to negotiate only the most significant provisions at the outset (term, rent, etc) but each of the following will need to be considered:-
What land is included within the lease – especially important in a lease for part of a building; Which structures are each party responsible for maintaining/insuring? What are the rights of access?
Who are the parties to the lease? Although this may sound obvious, a landlord may require a guarantee from at least one director where the proposed tenant is a small private company. Alternatively, the landlord may ask for a rent deposit of between 3 to 6 months rent as security, especially if the tenant has not been in business for very long.
What fixtures and fittings are included in the lease? Items of plant (central heating) should be checked as in good working order. Items affixed by the tenant to the premises during the term may become the landlord’s property.
What does the lease provide by means of rent review? The rent review clause should set out intervals at which rent will be varied, the procedure and timing for rent review and how the new rent should be calculated.
What other obligations may be imposed upon the tenant? Common restrictions include regulating the tenant’s right to assign or part with possession, limiting the activities which the tenant may carry out – the landlord may want to prevent anti-social activities but if he restricts the tenant’s user unduly he may prejudice the marketability of the premises and hence the rental at rent review time. The landlord will generally wish to impose limitations upon the tenant’s ability to undertake structural or other alterations to the building.
The lease should specify who will be responsible for insuring the property, what risks it should be insured against and what should become of the proceeds in the event that a claim is necessary.
The lease will provide whether the landlord is entitled to a service charge and, if so, how that service charge is to be calculated and what services must be supplied in return. The landlord will generally endeavour to recover all costs of running the building. A tenant (particularly under a short lease) will not wish to contribute towards major structural costs. There are a number of strategies for dealing with this which might include the establishment of a “sinking fund” - ensuring that major expenses are anticipared and paid for in advance - so preventing major fluctuations in yearly cost.
The lease may provide mechanisms as to what should happen in the event of disagreement between the parties. The lease will generally provide that the landlord is entitled to possession if the tenant defaults, for example, in the payment of rent. The lease may provide for other disputes (such as rent review) to be resolved by other mechanisms such as arbitration.
In each of these areas there is a tension between the interests of the landlord and those of the tenant. In order to try and gain the best result for you, it is important that we have a clear understanding of what you are seeking to achieve and that there is effective teamwork between yourself and your professional advisors. We will assist you in this, helping you liaise where necessary with your other advisors such as your surveyor and accountant. Equally, it is important that you understand the advice which we are giving to you – please do not be afraid to ask questions!
We are able to offer specialist advice.
Call 01323 720142 now for a consultation with a specialist Solicitor or a Lawyer at Lawson Lewis Blakers.