Taking on a commercial premises for the first time – or moving up into a larger property – can be a huge step for any business, bringing with it a raft of financial and health and safety commitments which all need to be taken into consideration.
Scrutinising the lease you agree as a tenant is key as it can affect how your business can operate. It will help you avoid being hit with unexpected costs in the future which you hadn’t accounted for.
What should be included in my commercial lease?
At a very initial stage, you will agree with your landlord the principle terms of your lease, often referred to as “heads of terms”. These should include:
- The type of property being let and the address
- The length of the term of the lease
- The amount of rent payable, how often it is paid, whether this is to be reviewed at a given time during the lease and if so, on what basis that review will take place
- The type of business or permitted use which can be conducted on the premises
- What improvements or works, if any, you can carry out to the premises
- Details of any additional security or deposit required by the landlord
- Whether or not you have a statutory right of lease renewal at expiry of the term
- Whether a tenant can transfer or sublet the whole or any part of the property
- Insurance provisions and who will be responsible for payment of insurance
- Any charge (service charge) to be paid by the tenant towards the cost of shared facilities or services provided by the landlord
- Any agreed break dates at which time either the landlord or tenant can bring the lease to an early end
It is always prudent to get your solicitor to cast an eye over the proposed heads of terms before agreeing to these. They can provide useful guidance and support in terms of other items that ought to be covered as part of those heads of terms, as it is often too late to try and renegotiate terms once they have been agreed between the parties.
What happens if I have a five-year lease and I need to leave before then?
Leases may include a provision known as a break clause which allows either the tenant or the landlord (or both) to end the lease at a specified date without waiting for the full term of the lease to expire.
It’s worth considering a break clause to get out of a lease earlier than lease expiry if needed, or a rolling break clause. This allows you to leave at any time after the break date arrives, usually on giving a specified period of notice to the landlord.
This break date will be dictated by what your business goals are for the short and longer term. It can offer flexibility and peace of mind that if the business does not pan out as initially anticipated you can bring the lease to an earlier end by exercising the break clause.
What if I need to change the business or how it operates during my lease?
Within the lease you would need a provision which allows for a future change of use during the lease term.
Leases normally have clauses that specify the type of activity the tenant can carry out within the premises. For example, if a restaurant begins to offer a takeaway service with food being collected from the premises then this could create a breach of the tenant’s covenant to use it only as a restaurant. However, if the permitted use as defined in the lease allowed for use as “a restaurant and as ancillary to that, a takeaway service”, then there would be no breach of the user clause.
This is why it is important to consider at the outset your short- and medium-term business goals so your solicitor can ensure that the permitted use allowed by the lease accommodates those intentions.
Can I sub-let one of the rooms in the building to another business to spread my costs?
Some businesses may want to share commercial premises with another tenant to spread the cost. It’s worth checking if part of the space can be sub-let to another tenant.
These are called ‘alienation provisions’ which dictate whether the tenant can transfer the lease to someone else, underlet the premises or share occupation of the premises. Thought has to be given as to whether the premises are currently too big or likely to become too big for your business, in which case it is prudent to get your landlord to agree to an underletting of a specific part of the premises which you no longer require.
The property is quite old, is there anything I should look out for?
If you have any concerns about part of the premises in terms of repair or the premises are older or not in as good a state of repair it is vital this is brought to the attention of your solicitor at an early stage.
It is essential to benchmark the current state of the property before you agree to a lease. Any photographs taken of existing wear and tear ,or to record the current state of repair and condition, need to be included within your lease as a photographic schedule of condition once agreed on by both parties. This can save you considerable expense later when your lease expires, so you don’t end up having to make repairs to damage or disrepair (known as ‘dilapidations’) which already existed.
A schedule of dilapidations can be presented to the tenant by the landlord at the end of the lease term which can often come as an unwelcome surprise, and it is not uncommon for disputes to arise.
It is also worth being aware that from 1 April 2018 regulations made it unlawful for landlords to grant new leases on properties that have an energy performance certificate rating below E. Again, it is important that all parties are clear in such circumstances as to where the responsibility for those upgrade costs will lie.
If your lease is referred to as “a full repairing and insuring lease (FRI lease)”, this means you bear the full responsibility for repairing not only the interior, but also the exterior fabric of the building. More importantly this includes structural elements of the premises such as the foundations or the roof.
While the landlord will usually have insurance for the premises, an FRI lease enables the landlord to recover from the tenant the cost of insuring the property. This is potentially a good option for a landlord as they are relieved of the responsibility of maintaining what could be a building which is in poor condition. The consequence of tis is that it provides a considerable risk to a tenant as the cost of such repairs could be substantial.
Early advice and proactive repair management is the best way for both landlord and tenant to protect themselves. Given the potential impact on your business and its finances, it makes sense to have the property inspected by a surveyor immediately prior to expiry of the lease. They can review any deterioration works needed by you in accordance with the terms of your lease to bring the property up to the required standard in which it has to be handed back to the landlord. Such steps ensure that you carry out those works and retain control over the purse strings, instead of having to reimburse the landlord for the cost of having to do those works and recover the costs from you.
What happens when my lease ends?
Under the Landlord and Tenant Act 1954 (“1954 Act”), unless the provisions of this legislation has been excluded prior to the grant of the lease, you have a statutory right to remain in occupation of the property even when the contractual term of your lease comes to an end. This is described as a statutory continuation tenancy, which under the 1954 Act enables business tenants to remain in their business premises until either they serve a formal request on their landlord for a new lease or the landlord serves a notice on the tenant to bring that statutory continuation tenancy to an end.
If you have this statutory right to renew you can, however, bring your tenancy to an end by ensuring that you have moved out of the premises by the end of the fixed term end date specified in the lease.
It is beneficial as a tenant to have the peace of mind that there is a right to require your landlord to renew your lease at the end of the current term should you wish. The 1954 Act grants a landlord only very limited grounds upon which they can oppose such a request. However, landlords quite often have legitimate reasons why they do not wish these renewal rights to form part of the lease. In these circumstances they will require the lease to be taken outside of these automatic renewal proceedings prior to it being granted.
It has to be pointed out that the provisions of the 1954 Act and the renewal rights that arise from it, is quite a complex area of law to understand. This is why it is recommended that you discuss the need for these automatic renewal rights with your solicitor prior to agreeing heads of terms.
My landlord wants to terminate my lease, but I want to remain in the building.
Because of the statutory continuation rights outlined above, under the 1954 Act the landlord must follow certain steps to end your tenancy where your lease is afforded those renewal rights. The usual method is for a landlord to issue a Section 25 notice which states the termination date which applies to bring your statutory continuation tenancy to an end.
The tenant has a right to a new lease, unless the landlord can prove one of the statutory grounds for regaining possession, in which case the landlord’s Section 25 notice confirms that he is not willing to renew your lease. The main grounds are:
- The tenant has an obligation to repair the property and they have failed to do so.
- The tenant has persistently delayed paying rent.
- The tenant has substantially breached other obligations under the lease.
- The landlord can offer suitable and reasonable alternative accommodation.
- Where the lease is only of part of the property, and the objection comes from the landlord of the whole of the property on the basis they can obtain significantly more rent by letting out the whole of the property as one.
- The landlord intends to demolish or reconstruct the property and must remove the tenant to do so.
- The landlord intends to occupy the property himself for carrying on a business or his residence.
What are the implications of the 1954 Act if I don’t have a commercial lease with my landlord?
The Landlord and Tenant Act 1954 potentially still applies where you have been in occupation for a business and your landlord has continued to receive rent from you.
As already stated, once the heads of terms are formally agreed between landlord and tenant these can be difficult to alter, which is why it is always worth taking the time to get a solicitor to review these for you before you go ahead and sign on the dotted line.
Quite often your solicitor will highlight other potential issues or items that you may not have considered, such as break clauses or other provisions, which afford you the flexibility that you require going forward.
Drafting, reviewing and advising on leases and commercial property is something we support businesses with both large and small.