Most businesses require a premises in order to operate. A significant number of businesses operate from leasehold premises Whether you are an individual, partnership or limited company there are key factors which you will need to consider when entering into a Commercial Lease.
It is imperative that the Commercial Lease is compatible with the business taking it on. The Lease will need to be reviewed to ensure that any restrictions contained in it do not prevent the business from operating and allow the business to fulfil its requirements.
The term of the Lease is the first important factor to consider as this is the length of time a Tenant will be granted to occupy a property by a Landlord.
If you are a new business you may favour a shorter Lease to begin with, whereas, if you are an established business you may prefer to acquire a longer Lease. This is something that will need to be negotiated with the Landlord at the outset and will largely be in the Landlord’s control.
SECURITY OF TENURE
Under the Landlord and Tenant Act 1954 Tenant’s who occupy a property for the purpose of carrying on a business have security of tenure. This means that they are entitled to remain in the property following the expiration of their Lease and they are, if required, able to apply to the court for a new Lease on similar terms.
These provisions can be excluded from a Commercial Lease meaning that at the end of the term a tenant would not have the right to stay in the property it is occupying and would not have the right to a new lease. The fact that a lease is excluded from the Landlord and Tenant Act 1954 does not mean that a new lease cannot be negotiated between the Landlord and the Tenant however, it would not have to be on similar terms to the current lease.
In addition, where a lease does have protection of the Landlord and Tenant Act 1954, there are also circumstances in which the Landlord may regain possession of the property at the end of the term, for instance if the Landlord is intending to occupy the property having owned the property for over 5 years or if the Landlord intends to demolish or reconstruct the property.
It is important to ensure that the current use of the property permits the business to operate. A Tenant should ensure that both the use is agreed in the Lease and also that the authorised use for planning purposes allows the property to be used for that desired use. There may also be restrictions on the title to the property which restrict certain uses. Each property has a permitted planning use and in certain circumstances planning permission is required in order to alter the use of a property. This involves additional costs and may not be something which the Landlord is willing to do or allow a tenant to do.
It is therefore essential to ensure that the use of the property is compatible with the business in order that the business may operate at the premises without any hindrances from a use perspective.
The amount of rent is usually negotiated at the outset between the Landlord and the Tenant. Under a Commercial Lease the rent is usually payable annually, quarterly or monthly. Dependent on how your business operates and receives payments, it may be worth negotiating how frequent rent payments will be required to be made. However, this is usually dictated by the Landlord.
It is not uncommon for a Lease to contain a rent review at a specified date or dates in the Lease. The revised rent would usually be determined on an open market value basis or based on the retail index prices index. If the Landlord and Tenant cannot agree the rent between them or cannot agree the increase based on the retail prices index there is usually a mechanism for an independent person to determine the rent or deal with a dispute.
Rent reviews are usually upwards only and therefore the rent would either stay the same if the rent was determined to be less than the current rent or would increase if the rental value of the property had risen.
Depending upon the arrangements of the Landlord and the property a Landlord may be obliged to charge VAT on the agreed rent and other payments due to the Landlord. When negotiating the terms of a Lease at the outset a Tenant should establish whether VAT is going to be chargeable in respect of the rent and other payments. Discussions regarding VAT, other form of tax and other monetary consideration should be carried out in conjunction with accountant’s advice.
In addition to the rent, a Commercial Lease may also include additional payments, such as service or estate charges, insurance rent and other costs and liabilities.
For example, if the Commercial Lease is being granted over part of a building, there may be areas which are used by multiple Tenants for which you will be required to a pay a proportion of the upkeep and maintenance.
In addition, there may be fees payable to the Landlord in relation to notice fees, costs incurred in addition to the business rates, utilities and any other outgoings.
REPAIRS & OTHER RESPONSIBILITIES
A Commercial Lease will set out the responsibilities of the Tenant and the Landlord. It is usually for the Landlord to place the obligations of the upkeep and repair of the property on the Tenant and it is therefore essential that the Tenants are fully aware of not only the responsibilities which are placed on them under a Lease, but also the condition of the property.
It is usually recommended that a survey of the property be conducted prior to entering into a Lease or agreeing to include a schedule of condition in the Commercial Lease. As well as limiting any liability you have to only being required to put the property back in the condition it was in at the time you entered into the Lease, as oppose to a full repairing obligation. This is to ensure that you will not be liable for any repairs or additional costs for things which were already in existence prior to your occupation of the property.
A Commercial Lease can include a break clause. This is a clause which allows for either the Landlord or the Tenant or both to bring the Lease to an end prior to the end of the term. A break clause can be drafted so that it may be exercised on specific dates or at any stage and will usually be subject to certain conditions being met.
In the event that a Tenant wanted to exercise a break clause they would need to ensure that a formal notice was served on the Landlord in good time and any specific conditions were met both on service of the notice and also on or by the date the lease is due to come to an end as a result of the break notice.
A break clause may be beneficial for Tenants, to ensure that the business is not tied into a Lease and has the option to terminate the Lease in the event that the business suffers a downturn, alternate premises are required or for any other reason. From a Landlord’s point of view the ability to break the Lease may give flexibility with regard to the use of the building. Whilst the provisions of a break clause will largely be dictated by the Landlord it may be worth considering the inclusion of such clause in order to protect the interests of the business.
The Landlord’s rights will be detailed in the Lease and usually include rights such as, the right to enter the property in order to inspect the property, the right to carry out any repairs which a tenant has failed to do etc. The Landlord will also usually request a clause be put in the Lease for the Lease to be terminated in the event of non-payment of Rent for a specified period of time. In addition, the Landlord can commence forfeiture proceedings in the event that a Tenant is in breach of the terms of a Lease and ultimately forfeit the lease and retake control of the property.
The above basic information provides a brief overview of the essential elements of a Commercial lease. If you are looking to enter into a Commercial Lease our specialist team of Commercial Solicitors can provide you with the assistance you require.