Commercial Leases - Overview
Whether you are a landlord looking grant a commercial lease or you are a prospective tenant looking to take a commercial lease, Lawson Lewis Blakers can help you.
Commercial tenancies are a particularly complex area of law and there are a number of potential pitfalls for the unwary, whether or not you are the landlord or tenant. It is essential to get good advice, and our lawyers will be pleased to help you from start to finish.
Usually a property to let will be advertised via a commercial lettings agent and the negotiations on the main terms will be carried out through them. First time tenants ought to consider obtaining advice before entering into negotiations with a landlord, whether or not such negotiations are conducted via an agent, as there may be terms which the landlord may try and impose without you fully understanding the implications. Don’t be tempted to rush into the transaction – you may end up regretting it later.
What should I look for in a lease?
A lease wrongly biased in favour of a tenant may affect the value of the landlord’s freehold interest. A lease wrongly biased in favour of a landlord may make the lease an overly onerous liability which the tenant cannot transfer to someone else or get out of.
A lease which fully reflects your needs should enable the landlord and the tenant to understand their legal position between one another, with clarity and certainty, for years to come.
Even if leases are for a relatively short term, they are often renewed. On renewal, the same terms are generally used as in the old lease. In other words, do not be lulled into thinking that “this is just a short lease” and that its terms are less important.
Below you will find a summary of the main issues and steps encountered in the grant or taking of a commercial lease. You need to allow sufficient time for these steps to be taken before you agree a completion date:
- Title - the landlord must have the capacity to grant a lease in the first place, and it will need to be established what restrictions or covenants affect the property.
- Rent and other sums payable - you will obviously need to consider what rent should be payable under the lease and this will of course be a key point in negotiations. However, you will need to consider what other payments will have to be made, such as service charge and contributions towards the costs of buildings insurance.
- Rent review – it is quite usual for rent to be reviewed at some point in the lease. The point at which the rent will be reviewed (if at all) will need some consideration and will need to be clearly set out in the lease.
- Value Added Tax – VAT has to be charged on new commercial properties (less than 3 years old). If it is an older building the landlord may elect to charge VAT on the rent. If VAT is charged then a tenant will need to consider the impact of this upon the rent and other outgoings under the lease and build this into cashflow forecasts.
- Repairing obligations – the tenant’s obligation to repair, in particular the standard of repair in which the tenant must keep the building, should be a major part of lease negotiations. A landlord will want to ensure that the property does not fall into disrepair, but equally a tenant will not want to have to spend lots of money to put a property which is in poor repair into a better condition. Prospective tenants ought to consider getting a surveyor in to assess the state of repair and condition of the building so that they can take the result of that survey into negotiations.
- Permitted use – a tenant will want to establish that the lease permits them to use the property for the whole scope of its operations and that there is a planning permission for the property to be used for their intended purpose.
- Securities – a landlord may often require some form of security from a tenant, such as a guarantor, a rent deposit, or in some cases, both.
- Security of tenure – will the tenant have the automatic right to renew the lease at the end of the term? This may be desirable for a tenant who wants to establish their business at their chosen location, and landlords who own the property an investment to make a return may be happy to have a long term tenant. However, some landlords will want to have more control over the property and will want to retain the ability to ask the tenant to leave the property at the end of the term without any threat of having to pay compensation.
- Break clause - can the lease be terminated by either the landlord or the tenant part way through the term? Tenants will want to ensure that they can get out of the lease if their business does not perform, whilst landlords will want to ensure that the tenant is committed to paying rent, so this can be a key point of discussion.
In order to try and gain the best result for you, we will listen to you in order to understand your needs and what you are seeking to achieve. We always strive to give you clear advice in plain English so that you understand the implications of the transaction.