A Brief Guide to Commercial Leases – Tenant’s Perspective

It is my firm view that the Tamil Community in this country will go from strength to strength and our positive contributions to the country will enormously increase in future years. I have no doubt in my mind that the British Tamil Chamber of Commerce will also grow from strength to strength. As we look to take our business activities to the next level and beyond, the Community will need organisations such as BTCC playing a pivotal role in facilitating the expansion and providing a platform for information sharing and co-operation between businesses and professions within the Community. I, together with my colleagues at Links Legal Solicitors, wish BTCC well in all its endeavours in service to the Tamil Business Community.

As business activity increases, it is natural that transactions in commercial property will also increase. Although many Tamils are now commercial landlords of multiple properties, established business owners and leaseholders of large commercial units and office blocks; the Community’s presence on our High Streets remains vibrant. In this article, the focus is on the commercial tenant due to the fact that most first-timers and expanding young businesses are likely to take a new lease or assignment of an existing lease for their trading premises and it is these fledgling entrepreneurs who need to be more vigilant against potential pitfalls.

Commercial Lease:

When taking a lease of premises for any business purpose, you will be taking on a ‘commercial lease’ or a ‘business lease’. Business leases can be full of words and phrases which are not easy to understand. These leases generally include provisions to allow the landlord to have a cost free investment. This means that a tenant will often take on more liabilities than they may realise. A lease is a binding agreement and therefore you should not enter into one without first considering whether you will be able to comply with the obligations imposed on you by the landlord and also ultimately whether you can afford the liability. A failure to comply with the tenant’s obligations could potentially result in either the landlord terminating the lease (forfeiting) and or taking the tenant to Court. The following may help you avoid some of the traps. Whether you are taking a lease of one floor in an office building or a lease of a whole industrial building the basic considerations remain the same. Here are some important points which you should consider before entering into a lease.

What Do You Need To Think About Before Entering Into A Lease?

Use and Planning Requirements: What do you want to use the premises for and is there planning permission for this use? Often tenants assume that because the landlord is granting a lease for office or industrial use this use is authorised. However, this is not always the case and the landlord should be asked for a copy of the Planning Permission at the earliest opportunity. Any activities you carry out at the premises which do not fall within the lawful planning use could potentially lead to enforcement action being taken against you by the Local Planning Authority. It is therefore important to ensure that your proposed use and activities are permitted both in terms of the lawful planning use and the contractual permitted use within the lease itself. In addition, there may be restrictions placed on particular uses of a property within the freehold title and any such restrictions should be considered.

Signs: If you will need a sign advertising your premises or your services, you may require planning permission for this. You will also need the landlord’s consent to erect the sign at the premises. It may be vital for your business that you are able to display your products or place posters on the front of the premises, which the lease may forbid.

Condition: Are the premises in good condition? You should consider carrying out a building/structural survey to establish whether or not the premises are in a reasonable condition, particularly if you will be taking on a full repairing liability covering the exterior and structure as well as the internal parts of the premises. Failure to do this may result in your being responsible for substantial repairs at the end of the term or during your tenancy. Try to resolve any problems with the landlord without delay.

Alterations: Will you need to carry out any alterations to the premises before you can use them? If so, raise this issue with the landlord sooner rather than later as he may not be willing to agree. It is worth noting that you may be required to reinstate the premises to its original condition. It is advisable to have a written Licence to Carryout Works entered into at the time of entering into the lease, should works need doing.

Transferring and subletting: If you think that you need to assign (sell) the lease or possibly sublet the whole or part, then you must ensure that your landlord will agree to this. Your lease will almost certainly state that the landlord can require you to enter into an Authorised Guarantee Agreement (AGA) when you assign the lease. This means that you would be required to guarantee the incoming tenants’ performance of the obligations in the lease and therefore you will still remain liable for any breaches, dilapidations or rental arrears. However, you may try to negotiate limitations on the circumstances where the landlord can reasonably require an AGA or an early release from the AGA. A lease with no power to assign or underlet may place a severe burden on your business as it may be impossible to move to a different premises. Fundamentally, you should seek to make the provisions relating to further dealings in the property as flexible as possible to accommodate the potential changes in the needs of your business.

What Will Your Obligations Be?

Internal Repair: If you have an internal lease only you will be required to repair the interior of the premises. If the premises are not in a good state of repair you may wish to consider agreeing a Schedule of Condition with your landlord. You can limit your obligations to repair the premises to the standard described in the schedule.

External Repair: If you are taking a lease of the whole building you may also be responsible for repair the exterior. Beware: This will include structural repairs and it is essential that you establish the condition of the premises before agreeing to this. You may also be obliged to contribute to the cost of structural repairs, indirectly, through service charge payments if you lease only part of the building.

Dilapidations: At the end of the term (whether by the lease coming to a natural end or following the exercise of an early termination clause) you will need to leave the premises in the condition required by the lease. If there are any dilapidations (lack of repair) the landlord will either require that you make the necessary repairs or will carry out repairs himself and charge you for doing so.

What Are the Costs Involved?

Almost all leases will include payment of rent but do not assume that this is all you have to pay. You should seek advice from a surveyor in connection with negotiations regarding the appropriate level of rent payable for the premises.

Rent Review: In most leases of more than three years there will be a rent review. Most business leases contain an upwards only rent review provision which means that you are unable to benefit from any decreases in market rent levels.

VAT: Check whether VAT is payable in addition to the rent. If a premium is payable for the grant or assignment of the lease it is very important to ensure that the correct VAT treatment is applied to such payments.

Deposit: You may be asked to provide a rent deposit. You should agree with your landlord at the outset the basis upon which the rent deposit will be held. Will the landlord keep it for the whole time you are a tenant or will he agree to release it, when, for example, your profits for the past three years equal at least three times the average annual rent?

Service Charge: If you are being asked to pay a service charge it is essential to obtain estimates of what this will be. You should request historical accounts from the landlord and check carefully the way in which the landlord or managing agents spend the money. It is best if the landlord agrees to cap the service charge since a service charge which is just described as a reasonable proportion of the total costs incurred by the landlord in providing the services could lead to large and varying sums being payable.

Insurance: In addition to insuring your own business risks you will normally be responsible for paying the whole or (if you occupy part) a fair proportion of the insurance premium paid by the landlord for insuring the structure of the building and for a loss of rent period in the event that the building is destroyed or damaged so as to make it unfit for occupation and use.

Rates and Other Outgoings: You will normally be responsible for all outgoings such as business rates and utilities.

Stamp Duty Land Tax (SDLT): Depending on the amount of rent/premium payable, and any VAT payable on these figures, you may have to pay SDLT. This is a compulsory tax payable to Her Majesty’s Revenue and Customs. Failure to pay correctly can incur criminal penalties and late payment will incur a fine.

Land Registry Fees: It may be necessary to register or note your lease at the Land Registry in which case additional charges will be incurred.

Landlord’s Professional Fees: It is normal for the tenant to have to pay the landlord’s professional fees (surveyor and solicitor) when he asks for consent to alterations to the premises or the assignment of his lease to another party. Sometimes the superior landlord’s fees will need to be paid as well.

How long will you need the premises for and can you stay on if you want to?

Length of Term: You must think carefully about your plans for the premises and your business. Do you intend to expand and will the premises therefore be too small in a few years’ time? Alternatively, is your business a new enterprise and future growth is therefore difficult to predict? If so, a short lease with options to renew may be better or you may prefer a long lease with regular break clauses.

Break Clauses or Early Termination Clauses: If the landlord agrees to include an early termination clause you should ensure that the break will be totally unconditional or conditional only on payment of rent (and not other sums payable under the terms of the lease). Agreeing to a break which is conditional on your performing all your obligations is little better than having no break clause at all. It is also imperative that you diarise any relevant break dates because if you fail to serve a break notice on time and the clause provides for a one off early termination date then you could continue to be bound by your obligations.

Security of Tenure: If your lease is excluded from the provisions of Part II of the Landlord and Tenant Act 1954 (the Act) you will have no automatic right to stay at the end of your lease. A lease which has the protection of the Act means that you have a right to request a new lease. This request can only be refused by the landlord on certain, statutory grounds. If it is important for you to know that you can extend your lease then this is a point which you should raise with your landlord early on in the negotiations. Note that if your lease is protected and you stay on at the end of the term (hold over) but you do not enter into a new lease, you will be required to provide 3 months’ notice before you vacate the premises.

What will your landlord be responsible for?

Repair: Where you are responsible for the repair of the interior only, you should ensure that the landlord will be responsible for repair of the exterior and any common parts. Often the money spent by the landlord on carrying out these repairs will be recouped from a tenant by way of the service charge.

Insurance: The landlord will usually be responsible for insuring the premises but normally you will have to reimburse him for the proportion of the costs attributable to your premises. He will normally be responsible for rebuilding the building if it is destroyed or damaged by an insured risk and your rent will normally be suspended whilst you are unable to occupy the premises if the damage is due to an insured risk and you are not at fault.

Services: The landlord may provide services such as providing lighting, heating, toilet facilities etc. You should establish exactly what facilities are to be provided to ensure that these are adequate for your needs.

Registration at the Land registry

Leases: Any leases more than seven years in length will now have to be registered at the Land Registry. This means an additional fee and additional work for your solicitor once the lease has been completed. Think carefully whether you in fact require such a long lease or whether a shorter lease is preferable but all leases of more than three years up to and including seven years must be noted against the registered title.

Easement: In leases of less than seven years, all easements (such as rights of way), must be registered at the Land Registry. Failure to register means that these easements are not legal and could result in you losing them. Therefore, think carefully before deciding not to use a solicitor as failure to do so may mean such things are overlooked.

Energy Performance

Your landlord should supply you with an Energy Performance Certificate (EPC) at the earliest opportunity during a transaction and at the latest, by exchange of contracts. EPCs reveal how energy efficient the building is by allocating a rating from Bands A‐G (G being the least energy efficient). The rating is based on standardised methods and assumptions about energy usage. An EPC will give you an indication of the potential energy costs related to the building.

Meanings of some commonly used words in the context of commercial leases:

FRI:                                                        A lease under which the tenant is either directly or indirectly responsible for repair and insurance.

Alienation:                                          The ability for the tenant to sell or sublet or lease.

Assignment:                                       the sale of a lease from one tenant to another.

Sublease or Underlease:              New lease of the premises or part of the premises granted by the existing tenant to a new undertenant in return for rent.

Alterations:                                        Any changes to building whether structural or non-structural.

Dilapidations:                                     Items of disrepair.

Easement:                                          A type of right relating to the use of land, in particular a right of way and a right to use services.

Schedule of Condition:                  A list (often with photographic evidence) documenting the state of repair and condition of building on a particular date. This is often used to limit the level of the tenants’ repairing obligations.

Security of tenure:                          Any right you may have to request a new lease at the end of the term.

Jeevah Daniel Haran

Consultant Solicitor

Links Legal Solicitors Redbridge