We recognise that for many businesses, acquiring a commercial premises is inevitably one of their largest investments. It is therefore imperative that a commercial lease is negotiated with the appropriate legal advice.
Failing to Understand Repair Obligations
The wording of your repair clause could be more onerous than you may think. Even specific wording such as ‘substantial’ carries a high level of repair obligations on you. This could therefore be extremely costly for you at the end of the term if not followed.
It would be prudent to instruct a qualified surveyor to carry out a survey of the property to identify any issues at the outset. Your advisor could then seek to negotiate a clause to ensure that any pre-existing problems are excluded from the repair obligation within the lease, such as the roof. It is not guaranteed a landlord would agree to this addition.
You may seek to limit the repair obligation to a schedule of condition. This document is a photographic schedule of the property and usually includes a narrative setting out the condition of the property. Normally, this is annexed to the lease after it has been prepared by a surveyor. The main benefit is that you will not be required to put the property into a better state of repair and condition than as evidenced by the schedule of condition. This is an important point of consideration particularly when taking a lease of a property in poor condition.
Overlooking Break Clauses
A break clause is a mechanism to end the lease at a certain agreed anniversary. This could be a tenant only, or landlord only, or a mutual option to break.
The benefit of a break clause is that it provides flexibility in the event your circumstances change. The importance and frequency of a break option is largely dependent on the length of the lease. It may not be in your interest to agree to a landlord break option as this could create uncertainty for your business.
You should be aware that the break clause will usually only be effective under certain conditions. Examples include ensuring the rent is paid up to date. A further example is following a specific notice period when looking to exercise your option to break. You should avoid agreeing onerous break conditions and this is something your legal adviser can help you with.
Lease Assignment
It is a good idea to have the ability to assign the lease. This allows the tenant to assign the residue of the term of the lease to a new tenant. Much like a break clause, the option of assigning your lease affords you flexibility in the long term and may be crucial should you wish to sell the business in the future. The landlord’s consent will usually be required before a lease assignment and that consent should not be unreasonably withheld.
You should note that whilst on face value this may be an attractive disposal strategy, you could be required to guarantee the obligations of the incoming tenant under what is known as an ‘Authorised Guarantee Agreement’. It may therefore be in your interest to exercise a right to break rather than to assign the lease to a new tenant if that is a possibility.
You should consider your options carefully and seek the necessary legal advice to ensure your proposed disposal is structured correctly.
Misunderstanding Rent Deposit or Guarantee Requirements
A landlord could request a rent deposit from you. A rent deposit is often a sum equivalent between three to six months’ rent. If the property is opted to tax, the deposit can increase by an additional 20%. In the event the rent is reviewed, the landlord can also ask for the additional rent from you to top up the deposit. It is imperative you budget for the rent deposit on the outset.
A landlord could ask for a guarantor from a director (or directors), a parent company or a third-party willing to do so. A guarantor guarantees the obligations of the tenant under the lease. If a personal guarantee is given by a director, then their personal assets are at risk in the event the tenant defaults on their obligations under the lease.
Ignoring Service Charge Details
A service charge covers the landlord’s costs in maintaining the common parts of a building and/or estate. This could include the cost of maintenance of a corridor, a courtyard or even a road.
It is important to understand the potential costs of a service charge. You could consider seeking to limit the amount of service charge payable. This would be a matter of negotiation between the parties.
Security of Tenure
As a tenant, you may wish to seek the benefit of security of tenure under the Landlord and Tenant Act 1954. You will then have a statutory right to renew the lease at the end of the term.
You should note there are seven grounds the landlord can object to a renewal of the tenancy at the end of the term. Examples could include persistent delays in paying rent which has become due, or if the landlord intends to demolish or reconstruct the premises.
Permitted Use and Restrictions
A commercial lease will usually only permit certain defined uses. Careful consideration should be given to the permitted user as a narrow definition may prevent flexibility in the event the needs of your business change or if you wish to assign the lease to a different type of business.
You should also be aware there may be other certain restrictions within the lease. These restrictions may include opening hours, or not to use the property for specific purposes. The reason for such a restriction may be to prevent competition with a neighbouring business.
If you would like to speak with a member of our Commercial Real Estate team, please do get in touch.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
