A commercial lease is a legally binding contract between the legal owner of the property (known as the landlord) and the occupier (known as the tenant). But negotiating a lease can often be a daunting and lengthy process for both parties, which can result in high legal costs.
It is important, therefore, to have a clear understanding of how this works, before either a lease or lease renewal is granted.
We have put together our ten top factors for tenants to consider, based on our years of experience as commercial property specialists.
When negotiating on the property ask for written responses from the landlord via the estate agent. This gives you a paper trial and allows you to check all the things which have been discussed are accurately documented in a ‘Heads of Terms’, which in turn are then written into a formal lease.
Common lease lengths are 3, 5 or 10 years in duration, although a tenant can request any length of lease from the landlord.
Commercial leases are either drafted inside or outside of the 1954 Landlord & Tenant Act. Being ‘inside’ the Act means the Landlord & Tenant Act 1954 provisions protect a lease, and the tenant benefits from the security of tenure. For a tenant to be ‘outside’ the Act, they must ‘contract out’, which means that the provisions of Section 24 to Section 28 do not apply. This is usually done by the landlord serving a specific notice to the tenant, which the tenant must accept and sign.
A tenant may request that the lease has a ‘break clause’ inserted. This is usually halfway through the lease term, but again a tenant could request this at any time. A break clause in a commercial lease is a contractual agreement that allows a landlord or tenant to end a lease early without penalty.
A rent deposit will be put in place on the grant of a lease or on assignment of an existing lease. A rent deposit is money provided by a tenant to its landlord, as security for payment of the rent and performance of the tenant’s covenants contained in the lease. A rent deposit deed will specify the circumstances in which the landlord can draw on this money and the conditions that must be satisfied for the deposit to be repaid to the tenant. The amount requested can vary depending on the landlord’s preference and covenant strength. The norm is 3-6 months of the headline rent agreed.
In a commercial lease, the concept of a guarantor plays a crucial role in ensuring the fulfilment of lease obligations. A guarantor can be an individual or company with capacity to guarantee the commercial tenant they will carry out their lease obligations, if the tenant does not oblige with their obligations.
Depending on the length of lease it is normal practice for a landlord to insist on having an opportunity to review the rent. Typically, this is hallway through the lease, but can vary depending on the landlord. As a tenant, you will want to minimise your costs, so proper negotiation and representation during rent reviews will be important. There are various ways in which the rent can be reviewed:
When negotiating make sure the landlord allows you either the right to assign your lease onto a new party or the right to sub-let the premises to another party. It is likely in either case that you will need to agree to being a guarantor for the duration of your lease. Try to make sure the only pre-condition of any lease assignment is obtaining the landlords consent in writing and that the landlord may not unreasonably withhold or delay giving his consent.
A full repairing and insuring (FRI) lease is a commercial lease that transfers the responsibility for repairs, maintenance, and insurance onto the tenant. FRI leases are common in England and are often used when a tenant rents out an entire building or the lease period is short. It is worthwhile getting a photographic Schedule of Condition carried out by a professional to record the condition of the property at the beginning of the lease.
Make sure your lease allows you to make non-structural alterations except where the landlord can demonstrate it would affect the operation of the building. Remember that you should notify the landlord of any non-structural alterations in writing that you wish to make.
UK law categorises buildings and land into specific uses, known as ‘use classes’. It is essential that a commercial tenant checks the use class of a property before committing to a lease. It is possible to apply for a “Change of Use” to change the consent on a building, however there are costs associated with an application (which is not guaranteed to be successful) and this tends to cause a delay of 12-16 weeks in the letting of a property.
A service charge in a commercial lease is a fee paid by tenants to a landlord, to cover the cost of maintaining and operating a commercial property. A service charge is charged in addition to normal rent payments, and they are intended to pass on the cost from a landlord to a tenant to recoup some or all the landlord’s costs. The need for, and importance of, service charges in a commercial property lease can vary dramatically depending on the nature of a property.
Business rates are a tax on the right to occupy commercial property in the UK. They are typically around 50% of annual rent and are a major overhead for businesses. Business rates are based on the property’s “rateable value”, which is an estimate of how much it would cost to rent the property for a year. Rates are paid over 10 monthly instalments. There are certain exemptions or reliefs available. For example, charities can claim 80% relief, whilst small businesses can also claim up to 100% rates relief depending on certain criteria. This is known as “Small Business Rates Relief”. To be eligible you must have a rateable value less than £15,000 and your business must only have one commercial property. More information can be obtained from the local authority in which you are leasing.
We hope the above is informative and you have now learnt more about being a commercial property tenant but if you have further questions or if you want further advice, then please call our team on 01903 251 600 or email enquiries@justiceandco.co.uk
