Seven Key Considerations For Commercial Lease Negotiations
Taking on a lease for commercial premises can be a complicated matter. This article sets out seven important considerations for commercial lease negotiations.
Tenant Break Clause
Tenants should consider whether their lease will include a ‘break clause’. This will allow them more flexibility within their lease as it allows them to end the tenancy agreement during the fixed term. There will be a certain stage or stages of the tenancy that the tenant can give notice to break, as well as a certain amount of notice which the tenant must give, though this should all be written into the tenancy agreement.
The 1954 Landlord & Tenant Act
Tenants should also consider whether their lease excludes them from the protection granted by the ‘1954 Landlord & Tenant Act’. This act grants tenants of business premises the right to remain in occupation at then end of the contractual term of the lease as well as the right to apply to court for the grant of a new lease. Being excluded from this statutory protection would mean that the tenant would not have the benefit of the statutory right of renewal at the end of the lease term.
Rent Review
An ‘open market rent review’ means that the price of rent that the tenant pays may be adjusted to reflect the rent that the landlord could achieve from the open market. This means that upon review, the rent paid by the tenant could increase if a ‘hypothetical lease’ is valued in order to arrive at a new rental figure. Rent Reviews are hard to pre-empt, and a Tenant may feel more secure in agreeing a fixed rent for the whole term at a higher level if certainty of outgoings is important. Rent reviews utilising an increase calculated by reference to the Retail and Consumer price Indexes have become increasingly common place in recent years but with inflation on the rise this should perhaps be resisted from a Tenant’s perspective.
Full Repairing Lease
A ‘Full Repairing Lease’ obligator means that the tenant is responsible for complete repair responsibility, regardless of the state of the premises when the lease was originally signed. A well-advised Tenant should consider engaging a building surveyor to produce a schedule of condition which records the existing condition and which can form the reference point in the lease for the repair obligation.
Tenant Guarantor
A Landlord may request a guarantee for a lease to a company Tenant. This is essentially someone (often a director or shareholder the tenant company) who can support the tenant’s obligations and guarantee liabilities on their behalf to the Landlord. Such guarantees can subsist for the entire duration of the lease and the Tenant should consider a financial or time-based limit on any personal obligations or even a rent deposit as an alternative form of security.
Town & Country Planning (Use Classes) Order 1987
The ‘Use Classes Order 1987’ is a statutory instrument applying in England and Wales, setting out planning use categories. There are many different classes of which a property’s use could fall under, which is something that should be considered by a tenant before agreeing to a lease. If their proposed use differs from the authorised use of the Landlord’s property, they may need to apply for planning permission for change of use which can be time consuming and expensive.
Alienation
This is the ability to assign, sub-let, or otherwise deal with a tenant’s interest in a lease of property. Assignment is the transfer by the tenant of its interest to another party. Sub-letting occurs when a tenant creates a further lease with a sub-tenant, yet the original tenant remains contractually obliged to the Landlord. Tenants should ensure they have the ability to progress either option to give them flexibility, especially for a longer term arrangement spanning a number of years.
Article credit
Thank you to our work experience placement Taryn Mitchell from Birley Academy who assisted in putting this article together.
