NEW BUSINESS LEASES – 10 Points for Landlords and Tenants.
Often everyone is in a hurry to agree and complete a lease but Donald Morrison, Partner of the Commercial Property team says, proceed in haste, repent at leisure.
Some things to consider before you agree Heads of Terms and commit:
1. Renewable or Non-renewable
Most business leases carry automatic renewal rights (and some potential compensation rights if not renewed) unless such rights are expressly excluded from the protection of the Landlord and Tenant Act 1954 before they are granted. This is an important consideration for both parties.
2. The length of the lease term
There are pros and cons for either party with a long or short term, a long lease term might be good for both parties but is not automatically so, especially if there are no break clauses, eg. with a long term, one has to consider the liability involved in being locked in to the lease obligations against the security of a long term.
3. Break Clauses
These can be mutual or for the benefit of one party and again can be attractive or detrimental for either party depending who they benefit. Conditions on a break need very careful consideration, the wrong conditions could prevent the tenant validly exercising the break. If a lease is renewable (see 1 above) the landlord exercising a lease break clause will not automatically end the tenant’s statutory rights to claim a new lease, which could make a landlord’s break, in practice, ineffective.
4. Repair and decoration and service charges
These carry potentially very large costs and liabilities for each party. The tenant may want the liability capped or limited by a schedule of condition, while the landlord may be anxious not to have any gaps in the tenant’s liability to repair or contribute to service charges which may leave the landlord with a bill to pay. Often with a lease of a whole building, the position is clear but lettings of part need careful consideration. It is when the lease terms are being negotiated that these matters need to be clearly agreed and then the lease worded accordingly. Dilapidation claims during or at the end of a lease can be huge.
5. Alienation
This is lawyer speak for rights in the lease permitting the tenant to assign (transfer), or sublet the lease (whole and/or part). The lease will contain conditions on such dealings and usually provide that the landlord’s consent cannot be unreasonably withheld. The wording of the rights granted and conditions can become very important for each party when a request for assignment or subletting is made.
See also AGA below.
6. Rent Reviews
The parties will need to agree what type of rent reviews (if any) will be included, eg. open market, RPI linked, fixed increases, maybe a combination or more exotic types such as Turnover linked reviews.
Also at what intervals, what happens if parties cannot agree, what assumptions and disregards apply etc.
7. Authorised Guarantee Agreements (AGAs)
Most business leases provide that on an assignment, the outgoing tenant (and their guarantor) must guarantee the incoming tenant for as long as that person holds the lease or until it ends. So, in such cases (which again is most of them), it is essential that a tenant appreciates they are not released from liability on assigning the lease.
8. Permitted Use
The lease will normally specify what the premises can be used for and this may be specific, eg. a dry cleaners or general, such as by reference to a “Use Class”. Too narrow and the tenant is at risk if they want or need to change the use, too wide and the landlord may find the premises are being used for undesirable purposes affecting their value. Also, such clauses may affect rent review values.
9. VAT
Some rents carry VAT from the outset if the landlord has opted to waive the usual exemption but, even if they have not, if the landlord exercises such an option during the term of the lease, the tenant will, in most cases, have to pay VAT on rents from that time, even if they cannot reclaim the VAT.
10. Everything else !
Taking advice from a lawyer and maybe a surveyor before Heads of Terms are agreed and a lease is even drafted can save time, money, misunderstandings and prevent unintended long term consequences. We are happy to have an initial discussion about the above and other matters without commitment and then to assist in ensuring your interests are protected.
For more advice, please contact our experienced and dedicated commercial property team to book your initial no obligation consultation or call now on 020 8949 9500.
