The toughening of the commercial property market in many areas is leading to some landlords becoming less willing to compromise on lease terms. As a result, tenants are increasingly being pushed harder to sign up to landlords’ preferred forms of lease.
In such a competitive market, it’s key that tenants understand what points really matter and agree satisfactory terms from the outset. Steve Schofield, associate solicitor at leading commercial law firm Thrings, highlights some of the common traps that tenants need to avoid.
Flexible lease lengths
Rights to end leases early – known as breaks – bring flexibility. But beware of innocuous-sounding conditions. Many breaks are highly problematic in practise because their conditions are difficult or impossible to comply with. When negotiating, agree that breaks will be unconditional, or, at worst, include only the conditions set out in the Government-supported Code for Leasing Business Premises.
If you are paying a high rent (say more than £100,000 a year), take advice on breaks early as it is often possible to avoid or delay tax if the deal is structured correctly.
If you operate a business that accrues goodwill in its premises, a protected lease (protected by the Landlord and Tenant Act 1954) can safeguard that goodwill by giving you a right to renew the lease at the end of the term (conditions and exceptions do apply so take advice well before the end of your lease).
Maintenance – how to protect yourself
Landlords generally want leases to be full repairing and insuring, or FRI. This requires the property to be left in near-perfect condition, irrespective of its condition at the outset. However, it is often agreed that it will only be handed back in the same condition, and the parties will arrange to record that condition by taking photographs or video (known as a schedule of condition).
When planning alterations, bear in mind they will usually have to be removed when the lease ends, unless the lease says otherwise.
Avoid being stung for major service charges
If you take a lease of part of a building, or a unit on an estate, it’s usual to pay a service charge. The core charges are usually for maintenance of the structure of the building and any shared areas/facilities, but it’s common for leases to give the landlord a wide discretion on how much to spend, and how to spend it.
Tenants can often be required to pay for substantial and rarely-incurred expenditure (for example the replacement of a roof or access road, which might be done only once every few decades) even if they only have a short lease. The courts won’t intervene to save tenants – in a recent decision, the Supreme Court upheld the service charge provisions in leases of holiday chalets, which could require owners to pay fixed charges of over £550,000 a year each.
A service charge cap (an agreed limit to the maximum yearly charge) is the simplest and best protection.
Footing the bill for existing problems
Leases usually contain seemingly innocuous clauses requiring the tenant to comply with all laws, but this can have unexpected consequences. For example, environmental law can require an occupier of a property to clean up contamination they didn’t cause, and responsibility for compliance with disability discrimination legislation (which can be costly) generally also rests with an occupier.
If a property is new, make sure you won’t be responsible for dealing with any construction defects, either by obtaining guarantees from the construction team, or by carving this liability out of the lease.
Thinking ahead, it’s also important to agree that you won’t rebuild the property if it is destroyed by a risk which couldn’t be insured against. Following high levels of terrorism in the early 1990s, many insurers ceased to provide terrorism cover for commercial properties, a problem only solved by the introduction of a government-backed scheme known as Pool Re. Similar issues are occurring now around flood risk. If the property was destroyed by an uninsured risk, without specific provisions in the lease the tenant will be liable to rebuild the property (directly, or through the service charge).
Take advice early
The best advice is to take advice early. Most commercial property lawyers will welcome the opportunity to comment on proposed deal terms free of charge. The earlier these issues are raised, the better the chance of securing the protections you want.
A good surveyor is also essential. He or she will be able to advise you on rent and incentive packages, the condition of the premises, and also the building or estate to give you an idea of likely service charges.