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Things for tenants to consider when taking a lease of Commercial Property

Posted on 23 November 2020 by Hannah Jones

Things for tenants to consider when taking a lease of Commercial Property

We are currently in the midst of a second lockdown, with hope that restrictions will be lifted prior to Christmas, but with no certainty. ‘Non-essential’ businesses remain unable to open and it is unknown what the lasting impact of the coronavirus pandemic will be on the economy.

At this challenging time, the Government have introduced a variety of protections for business tenants relating to rent recovery. Many landlords are also doing what they can to help support their tenants.

Despite the current uncertainty, I am still being instructed by tenants in connection with new leases of Commercial Property. Those tenants are eager to get into premises and make a success of their businesses once Government restrictions are lifted. I also continue to be instructed by tenants in connection with renewals of their leases.

It is important for tenants to take legal advice when taking a new lease or entering into a lease renewal. In the current uncertain market, landlords are even more eager to secure tenants in order to secure payment of rent. It is critical that tenants understand what their lease obligations are and that they ensure that the terms of the lease are as expected.

Some points for tenants to think about:-

1. Is the rent appropriate and will there be rent reviews?

Advice on the level of rent, when rent reviews will fall and how rent reviews will be calculated should be taken from a Commercial Property Agent. A Commercial Property Agent will be able to confirm whether the rent is fair in the current market and advise you on how rent review will be calculated, for example it may be adjusted according to the open market, or it might be index-linked.

We can negotiate the definition of ‘Rent’ with the landlord’s solicitor e.g. does it include payment of insurance contribution or payment of a Service Charge? If so, what is the contribution, how it is calculated and can it be capped? Are there any additional hidden costs you might be subject to?

2. What will be the permitted use of the Property under the lease?

Does the lease enable you to use the Property as you intend? Is the permitted use as defined too narrow so that although it covers your niche use, you may find it difficult to later expand your own business? Or assign the lease to a new tenant? (if the lease permits assignment).

3. What will be the term of the lease?

You should take advice on the term of the lease, and how this suits your business and the current market, from a Commercial Property Agent. Landlords may want a longer lease to secure you as a tenant for a longer period. Would a shorter lease with the option to renew be better for you?

A lease of more than 7 years is compulsorily registerable which means that it must be registered at the Land Registry following completion. This is something which we can deal with for you.

4. Are you able to ‘deal’ with the lease during the term?

Typical ‘dealings’ include assignment, subletting and charging. Even if at the outset you do not intend to assign the lease during the term, having the flexibility to do so can be a benefit.

We can negotiate with the landlord’s solicitor the landlord’s requirements for dealings, for example if you assign the lease the landlord may want you to enter into an Authorised Guarantee Agreement (“AGA”) in order for you to guarantee the performance of the new tenant. We can advise you on your obligations under an AGA, and any other conditions your landlord may want to impose.

5. Are you able to break the lease during the term?

We can negotiate with the landlord’s solicitor to ensure that a break clause is fairly drafted to enable a tenant to break the lease early. For example, a landlord may wish to impose conditions that the break clause cannot be effective if not enough notice has been given, there are arrears of rent or the Property is not vacant. These are fair conditions. An unfair condition could be to prevent the break being exercised if there are outstanding breaches of tenant’s repair covenants (however small).

6. What are your repair obligations and can you make alterations/additions?

We recommend that you agree a Schedule of Condition with the landlord. This will be annexed to the lease as evidence of the current state of repair and condition of the Property. We can ensure that your obligations in the lease do not require you to put the Property into a better state of repair and condition than it currently is.

We can negotiate the conditions/restrictions on alterations with your landlord’s solicitor so that you can ensure any required alterations are capable of being made in accordance with your business needs.

You may for example want to ensure that you are able to add signage to the Property, this is something we can agree as a term of the lease.

It will also be important to think about how the Property should be returned to the landlord at the end of the term if any improvements/modifications are made i.e. whether the Property should be returned to its original condition.

7. Who will be responsible for what?

Whilst we can advise you on your obligations as tenant under the lease, we can also ensure that you know what your landlord is responsible for. For example the landlord may be responsible for insuring the Property and maintaining the building and common parts. You as tenant will be able to enforce the landlord to comply with their covenants under the lease.

8. Is the lease ‘contracted out’ and what does this mean?

A landlord and tenant may agree that the tenant of a Commercial Property will not have a statutory right to a renewal lease when the term comes to an end. If this is agreed and the proper procedure is followed, then the lease will be ‘contracted out’.

For the tenant, it is more advantageous for the lease not to be contracted out i.e. the lease remains within the protection of the Landlord and Tenant Act 1954 so that the tenant benefits from security of tenure.

We can advise you on the consequences of the lease being contracted in or out of the Act and your rights under the security of tenure provisions.

9. Consequences of breaching the terms of the lease

We can advise you on the consequences of non-compliance with lease covenants e.g. non-payment of rent. We can advise you of the landlord’s rights to re-enter the Property and forfeit the lease and timeframes imposed by the terms of the lease.

Next steps

Not only should you take legal advice when taking a lease of a Commercial Property, but you should also take advice from a Commercial Property Agent on the agreed terms and how they align with your business needs and the current state of the market. You should also take specific tax advice from an accountant or financial advisor.

Should you wish to discuss any Commercial Property queries please feel free to call me on 01278 454468 or email at hannah.jones@pardoes.co.uk. I would be happy to give you a free no obligation estimate of legal fees and costs and answer any queries that I may be able to assist with.

Hannah Jones, 20/11/2020

Posted in: Company Commercial, Commercial Property