26th August 2020

Getting your head around leases

When it comes to commercial leases, they are often very complex and contain lots of confusing clauses which can, if misunderstood, be very expensive.

Commercial leases are used when an individual or business rents out a premises to operate its business. The business can be a retail store, restaurant or warehouse. They are often very complex and contain lots of confusing clauses which can, if misunderstood, can be very expensive.

It is really important that prospective tenants review the terms of their leases to protect their own interests and wallets! Without having proper legal advice, the cost to tenants can be enormous and often result in costly litigation battles with landlords.

If you ever receive a lease, the key points to check are as follows:

1. Use

The use provisions specify how premises can be used. For example, it may state the premises can be only used for warehousing or light manufacturing. There is often a clause stating that the landlord does not confirm the premises can actually be used for the purpose stated in the lease. It is therefore important for tenants to check whether a proposed premise has appropriate planning permission for the intended use.

2. Lease term

It is important for the tenant to have a strong understanding of the term of the lease. This dictates when a tenant can take occupation and start trading. It also determines how long a tenant can stay at premises before having to renew the lease or move elsewhere. Landlords often prefer to have longer lease terms because this provides greater financial security, however, tenants often prefer a shorted term to see how trade conditions fair over the foreseeable future.

3. Alienation

Often leases contain an ability for landlords to assign or under let. Without reviewing the assignment provision carefully, there are often a number of hurdles which a tenant needs to jump through before a landlord will grant consent to an assignment. Sometimes, these hurdles can be very substantial and can discourage potential assignee’s from taking on a lease. The landlord may also place additional conditions on an assignment which a tenant was not expecting to see so again it is important that these are checked thoroughly.

The same goes for sub-lettings. Often leases contain a substantial number of hurdles which a tenant must comply with before subletting premises. The hurdles can be substantial and, again, may limit the terms you can offer a potential subtenant.

Both assignments and sub-lettings do not mean a tenant is not “off the hook”. Commercial leases are designed to ensure that the tenant either guarantees all the obligations of an assignee or, in the case of a subtenant, they still have to comply with their obligations in the head lease.

4. Renewal rights

Often tenants are offered a lease outside the protections of sections 24 to 28 of the Landlord and Tenant Act 1954. In brief, this means that at the end of the term, a tenant must either have a new lease in place agreed with the Landlord (should landlord agree) or have left the property. There is no obligation on the landlord whatsoever to offer you a new lease. Even if a landlord does offer a tenant a new lease, there is no restrictions on the type of terms that a landlord will offer i.e. you have no control over the new rent, length of term etc. If a tenant has built up goodwill at a premises then moving can have an adverse effect on the value of your business. Often, the relocation costs for tenants means leaving a property at the end of a term can be expensive, so it is important to check the lease has the relevant protections.

5. Repair

The vast majority of commercial leases contain a full repair obligation. Tenants often believe this is simply leaving the property in the condition they found it. Unfortunately, this is not the case. A full repair obligation means the tenant must repair all items of disrepair whether they were present before or during the term. As you can imagine for old properties in a poor state of repair, the repair obligation will be substantial. Often tenants fail to do this and they are left with a very substantial dilapidation’s payment due to the landlord. You can agree with a photographic schedule of condition with the landlord to help mitigate these costs.

6. Alterations

Modern leases often contain strict prohibition on external and structural alterations. Many tenants are often caught out when instructing contractors, as the works often involve altering the structural fabric of the building – which means tenants fall foul of these provisions. An example is the installation of air conditioning systems. These involve cutting into structural walls and installing compressors on the outside of a property – all of which can land a tenant in trouble with a landlord, even though tenants believe the works are harmless in nature. It is important a tenant checks the alterations provisions and ensures any licence for alterations does not place excessive obligations on a tenant.

7. Reinstatement

When vacating a property, many tenants often fail to check their reinstatement obligations. Some leases allow the landlord to decide which alterations need to be removed at the end of the term. This can be some or all of them. We have seen instances when landlords (as permitted under their lease) serve a notice on the final day requiring a full strip out of all alterations. Clearly this is not enough time. Landlords then place this cost in the final dilapidation’s payment due from the tenant. When calculating the cost, landlords are under no obligation to find cheap quotes. This can be very expensive for tenants and often lead to lengthy litigation battles.

8. Expenses

It is important that tenants are fully aware of the type of expenses which they are responsible for. The vast majority of commercial leases place all expenses on the tenant. The expenses often relate to obtaining the landlord’s consent to any assignment, sublease, alteration or even installing signage. The expenses are usually on a full indemnity basis and include all the landlords legal, surveying and possibly accountancy fees. There is no obligation on the landlord to choose the cheapest provider.

Commercial leases also require the tenant is to pay all costs associated with the landlord preparing a schedule of dilapidations at the end of the term. The costs often include legal fees for enforcing the schedule. As we mentioned above, a dilapidation’s payment can be substantial on its own but together with all associated surveying and legal costs, the costs will be even greater for an outgoing tenant.

As you can see, a commercial lease is complex documents with a number of hidden clauses. The clauses may be landlord friendly and place significant costs and burdens on the tenant. Most tenants have no idea of the type of costs and liabilities they will incur by signing up to a commercial lease. It is important that any commercial lease you receive is reviewed by a trained professional who can explain the implications of the various clauses and renegotiate them to help minimise the costs you incur.

Need some advice on commercial leases, we’re here for you – get in touch.

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