People often try to keep costs to a minimum by not obtaining professional advice when negotiating the terms of a commercial lease. Whether you are taking a lease for the first time or you are a sophisticated commercial client, receiving advice at the initial stages and ensuring that your interests as a tenant are protected, can save you money and time in the long term.
A lease is a contract between you and your landlord, expressing the terms on which you are legally entitled to occupy the property. The lease will set out both parties legal rights and any obligations which you, as the tenant, need to abide by throughout the term of your occupation.
Many people do not realise the meaning or effect of clauses within their lease and ignorance of the lease terms is not a defence. By signing the lease without this understanding, you are still legally bound to adhere to the terms, which will often give rise to disputes when the terms are not deemed favourable.
Before starting any negotiations, you should consider the following:
1. Does your landlord have sufficient interest in the property to grant you a lease?
Is your landlord the freeholder (legal owner) of the property? If the answer is no and they are a tenant, they will almost certainly need the consent of the freeholder to be able to grant you a lease.
Similarly, it is essential for the freeholder to gain the permission to lease a property from any mortgage or charge holder. If permission has not been granted the landlord, undoubtedly, will be in breach of their agreement and you, as an unauthorised tenant, could face eviction if the property became subject to a repossession order.
2. Does your lease need to be registered at the Land Registry and how much is Stamp Duty Land Tax?
If your lease is for a term of more than seven years, it must legally be registered at the Land Registry against the property title and a registration fee must be paid. In some instances, it is also best practice to have your interest ‘noted’ in a property.
Depending on the amount of rent payable under your lease, Stamp Duty Land Tax will also need to be paid to HM Revenue and Customs.
3. What is being leased to you?
You must ensure that your lease provides, in sufficient detail, every part of the property to which you are occupying and all its associated rights. Rights such as the use of the communal areas, access and egress from the property and parking facilities can often be overlooked as inevitable or trivial matters but may prove problematic and expensive to rectify.
4. How much is your service charge and what does it include?
A tenant may be liable to pay a service charge to their landlord. A service charge is a fee paid by the tenant to the landlord (on top of the rent) to cover the cost of general and planned maintenance to any common areas – those beautiful landscaped areas come at a price! It is prudent to establish from the outset how much your service charge may be. Is it fixed? If not, how much is it likely to increase by during the term?
5. How much is your rent and will the rent increase over the term?
You will want the reassurance that the rent due under your lease is fair and similar to market value. In addition, many leases have a rent review provision where, by a specified date, the landlord can review and increase the rent. It is important that the clause detailing the rent review procedure is not biased and you do not end up in a financially difficult position, paying rent which exceeds market value.
6. What are your other obligations under the lease?
You must fully understand what your obligations are under the lease and ensure that they are not onerous by negotiating to limit your liability. Obligations may include restrictions on the use of the property and repair or maintenance of the property. If the tenant breaches any of its obligations under the lease, the landlord is entitled to forfeit the lease and ‘re-enter’ the property.
Commercial leases will often impose full repairing and insuring obligations on a tenant. This means that you may have to return the property to the landlord in a better state than it was at the start of the lease. Such risks can be mitigated by negotiating limits on the repairing obligations.
7. What happens when your lease come to an end?
The most common way a lease will end is on the contractual expiry date whereby, the tenant will vacate the property. However, the Landlord and Tenant Act 1954 is legislation which gives a tenant, occupying a property for business purposes, a statutory right to renew their lease on similar terms to their existing lease. The landlord can request that the lease is contracted out of the Landlord and Tenant Act 1954, so it is important that you consider your rights as a tenant prior to entering into a lease.
8. Can the lease be terminated early?
There is also often a break option for the landlord or tenant (or tenant only) part way through the lease. If the correct notice is given within the terms of the lease, you or the landlord may terminate the lease on the break date. It is important for you to take advice on serving the notice correctly. If the notice is served on the landlord incorrectly and not in accordance with the terms of the lease, it will be deemed invalid and you could be liable to continue the lease for the remainder of the term.
This is a mere snapshot of some of the considerations when negotiating a lease. Early legal advice can speed matters up and ensure that you occupy your premises sooner, but more importantly, with less risk.
If you feel that you need assistance with any of these matters, or have any queries, please contact Commercial Property Partner, Philip Roberts, who will be more than willing to help.
Written by Trainee, Samantha Chase.