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Key points for tenants to negotiate in commercial leases

 

I have lost count of the number of time I have been contacted by clients – new and old – asking me to advise them of their rights under a business tenancy. This usually happens when a tenant is thinking of making a change – either moving to new premises, renewing an existing lease or selling their business – which is usually too late. It’s incredibly important to know what to look out for before entering into a lease. Landlords usually rely on a number of factors when negotiating lease terms – using their prior experience (which tenants often don’t have) and the advice of their agent and solicitor. Tenants can and do pay for their own legal advice but terms are often already agreed before a solicitor is appointed and so it becomes harder (and more expensive) to change these once discussions go via solicitors.

 Commercial leases do vary widely, but there are some key points that all tenants should be aware of at the negotiation stage to ensure that they get a form of lease that they need, or at a bare minimum, understand. Here are just a few of them:

 Contractual Term: Think very carefully about what you / your business needs. If you want to ensure you have the premises for a set period of time, then propose that term to the Landlord. A Landlord, generally, will want to ensure that its premises are occupied at a reasonable rent for as long a period as possible. That is not necessarily compatible with a tenant’s needs. If a property is leased, the tenant becomes responsible for outgoings in respect of it, and often for maintenance costs as well. Be aware that it is not in a Landlord’s interests to allow a tenant to exit early. Yes, they may agree to it if they are reasonable and sympathetic to changes in your business’s circumstances but they are by no means obliged to.  

Ability to terminate the lease early: this is known as a break clause and they can take on different forms. They are often on a set date, in the middle of a contractual term, and essentially allow a tenant or a landlord or both the opportunity to bring an end to the lease before the term has expired. A tenant-only break clause is preferable to tenants. They are the perfect solution if you are unsure as to how you business is going to do – if things don’t go as well as you’d hoped you have the ability to cut your losses and get out of the lease early.

Passing the lease on: assuming you are tied into the contractual term, another way of allowing you to leave early is either find a person to sub-let to, or assign the lease to, a third party. If you sub-let you are still responsible for the premises, but you pass on the same responsibilities to the sub-tenant. If they don’t comply, your landlord will take the matter up with you and you must take it up with the sub-tenant.  If you assign the lease, the lease becomes the responsibility of the assignee. Do not assume that you will able to walk away from your responsibilities completely though: a standard condition of assignment imposed by landlords is that an outgoing tenant step in as guarantor under the lease: if the assignee defaults then you may be required to take the lease back for the remainder of the term and pay any sums due under it. Always check what the individual lease provisions are regarding sub-letting and assignments.

Maintenance responsibilities: be sure you know what you are taking on. The starting point for any lease is that the tenant be obliged to repair and maintain it in a good and tenantable condition. Tenants are all too often keen to move into premises and they don’t realise that when they take them on in a less than perfect state, that the Landlord won’t necessarily take them back in the same condition. They can – and do – insist on extensive repairs and redecoration. Anything beyond putting right normal wear and tear is often viewed as unfair by tenants. One way of avoiding this is to insist that these maintenance obligations are subject to the state of condition and repair that they are in as at the time you take possession. Either a survey and / or extensive photos will be needed to prove this and this evidence will need to form part of the lease. If nothing else, a survey gives a tenant the opportunity to realise what they are taking on: you wouldn’t buy a property without a good understanding of its condition, so why would you lease one?

 

So, you’ve enjoyed the premises and the contractual term is coming up:  what next? If the landlord and tenant (together) have not contracted out of the provisions of section 24-28 of the Landlord and Tenant Act 1954 then when the contractual term comes to an end a tenant will automatically have the right to remain – providing that the landlord has not issued notice of its intention to take the premises back. This is known as having “security of tenure”. Assuming you have been a good tenant and have complied with the covenants contained in your lease the Landlord can only take the premises back under certain (limited) circumstances. You will then either take on a new lease following the end of the first term, or stay in occupation under a periodic tenancy. It is preferable from the Landlord’s perspective to have you enter into a new lease with any new terms you agree to. If you simply remain in situ then your tenancy will become a periodic one. The same obligations and conditions will apply as previously but the notice period both parties will be required to give may be different.

 

 

Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact jo.knight@everys.co.uk

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