What is the Tenant responsible for?
A typical lease has never been seen as a contract whereby a building owner provides a service to an occupier but one intended to provide the landlord with a reasonable return on his capital invested in the land and buildings with the tenant taking responsibility for all of the costs and risks. This has turned into a form of commercial lease known as the Full Repairing and Insuring lease. Under such a lease, the tenant’s responsibilities are numerous and may include insuring the premises. The landlord’s obligations may be more limited and quite commonly extend to no more than undertaking not to interfere with the tenant’s occupation.
In larger multi-occupied building a lease of the interior of that part of the property they will occupy is more usual. The exterior and any common areas and services can remain under the direct control of the landlord. In such circumstances the lease will usually allow the landlord to recover the cost of maintaining and repairing the exterior services and common parts and insuring the building by way of a service charge. Financially, the effect is the same and this form of lease is commonly called an Effective FRI lease.
It is sometimes possible to agree with a landlord limits on the tenant’s liabilities by way of a cap on a service charge or by excluding responsibility for certain parts of the building. In addition to the rent, the tenant may be expected to pay for utilities, business rates and sometimes professional fees.
How long a lease will I have to take?
The length of the lease is purely subject to negotiation. For offices, 3 to 10 years is the norm, with 10 to 15 years more prevalent in retail premises. In the case of warehouse and industrial premises, leases of all lengths are negotiated, although longer than 15 years is now rare. Leases tend to become longer when larger accommodation is involved, but leases in excess of 20 years are now quite rare, although some leisure operators will take 35-year leases.
How is the rent calculated?
The landlord will normally quote a rent based upon a rate per square foot (or metre) applied to the floor area of the property. In the case of factories or warehouses the Gross Internal Area ‘GIA’ will be used. This is the area inside the external walls without any deductions. For shops and offices the Net Internal Area will be used whereby non-usable areas e.g. stairs, toilets and some corridors are deducted from the GIA. In the case of shops the Net Area will then be Zoned to enable a comparison between the trading potential of different shaped shops to be made. We produce a separate document explaining retail Zoning in detail.
Will I get a rent free period at the start of the lease?
It is usual for a tenant taking a new lease to be able to negotiate a rent-free period, or perhaps a reduced rent for a time, at the beginning of the lease. This is often stated as being for fitting out purposes but it is no more than an inducement to take the lease and may bear no relation to the actual period fitting out is likely to take.
The customary amount of rent free varies between different market sectors and usually depends upon the length of lease, the rent and the financial status of the tenant. If the financial status of the tenant, the covenant, is strong enough, a capital payment might also be negotiated. Occupiers, though, need to be wary of agreeing to pay a rent above market levels in consideration of a long rent free period or capital sum as this can leave them at a substantial disadvantage if the market deteriorates.
What are rent reviews?
Any lease in excess of 5 years will customarily have a rent review, either at 3 or 5 yearly intervals, that allows the landlord to revise the rent to a market level. Such reviews are invariably upward only so the amount paid will not go down even if rental levels in an area fall. The Government has been putting pressure on the UK property industry to make a change to this practice but it has not had any effect so far and, in reality, few landlords will agree to downward reviews. If the landlord and tenant cannot agree a fair rent, at review, then the amount is decided by arbitration.
What happens if I don’t need the property any more?
Unless the ability to terminate the lease early has been negotiated (a break option) the only option will be to assign the lease or sublet the property. Most leases allow the tenant to either assign or sublet the whole property but never to assign (and not necessarily to sublet) part. Where subletting of part is permitted, there are frequently additional conditions governing the total number of subtenants; which parts may be sublet; or the terms of the subleases that may be granted.
In the case of an assignment, the original tenant will typically be required to provide a authorised guarantee agreement that the new tenant will honour its obligations.
Can I alter the property to suit my business?
Most leases allow the tenant to carry out alterations as long as they obtain the landlords consent and oblige the landlord to be reasonable about giving consent. It is quite common for this right to be restricted to internal non-structural alterations.
Anything more than minor alterations may require a formal Licence for Alterations to be drawn up by solicitors including the fitting out works at the beginning of the lease. The tenant will usually have to undertake to return the premises to their original condition at the end of the lease, if the landlord requires it.
What other terms will the lease contain?
Landlords and tenants are completely free to agree whatever terms they wish although a clause would not be enforceable if it infringed the legal protection granted to all tenants under the law. Inevitably, landlords try to retain a degree of control by placing restrictions on the use of the premises or to whom it may be assigned or underlet, but if these restrictions are too onerous, they will affect the rent the landlord is likely to receive at rent review or on renewal – so most landlords are reasonably commercial about this.
What happens at the end of the lease?
Leases of business premises longer than a year automatically have security of tenure. At the end of the lease, the tenant has the right to a new lease for up to 15 years on terms similar to the old lease but at market rent. There are certain circumstances in which the landlord can prevent the tenant exercising that right, e.g. if he wishes to redevelop the premises, but otherwise if the landlord and tenant cannot agree a new lease, then a court will grant a new lease on terms it considers are reasonable under the circumstances. It is possible for the landlord and tenant to agree at the outset that the tenant will not have this right to renew. This is called ‘contracting out’ or taking an ‘excluded lease’. It is quite common to do so in the case of small to medium sized office suites in multi-let buildings, but rare in the case of shops or industrial and warehouse premises
When the tenant eventually leaves they will normally have to return the premises to the landlord in good repair and, if the landlord requires, put back to the original specification, i.e. with any alterations reinstated. This liability for repairs, called dilapidations, can be substantial at the end of the term – if the work is not done the landlord can seek damages. If the premises are in a poor condition at the outset, however, it can be limited somewhat by arranging for a Schedule of Condition to be prepared and attached to the lease. The tenant’s obligation is limited to maintaining the premises in no worse a condition than that demonstrated by the schedule.
Comments