Most business-people looking for premises for their business will now be looking to rent rather than to buy. So when you are looking to rent commercial property you may be offered premises where the owner (or landlord) is granting a new lease or ones with an existing lease. Here we look at taking a new lease and the points which have to be considered.
A lease creates a binding contract between landlord and tenant. It will represent a major financial commitment so it is essential that any new lease matches your business requirements. So it is important that you do not enter into any legal agreement until you fully understand all of its terms and conditions.
Agreeing Heads of Terms
The first step will be the agreement of terms with the landlord or its agents, which should be recorded in a document known as the Heads of Terms. These will include such obvious matters as the details of the landlord and tenant, a description of the premises, the period for which the lease is being granted and the rent.
It can be worth employing the services of an expert surveyor to negotiate terms, especially when taking a substantial lease. However this may be a luxury beyond the resources of a smaller business. In many cases the landlord will only offer terms on a ‘take it or leave it’ basis with little or no room for negotiation.
The Heads of Terms should also cover such matters as the purposes for which the property can be used, any rent-free fitting-out period, any works which the landlord or tenant agrees to undertake, and any break clause enabling the tenant to terminate the lease before the end of the agreed term. Other terms may need to be agreed depending on the type and condition of the property and the business to be carried on.
The Royal Institution of Chartered Surveyors (RICS) publishes a model form of Heads of Terms for a small retail business lease, which may be used. If not it is worthwhile looking at this form to see what items should be included.
Considering the draft lease – why a solicitor’s advice is important
The Heads of Terms are not themselves a lease, so once they have been agreed the landlord will probably instruct its solicitors to prepare the actual lease. In some cases the landlord’s agents may themselves issue a lease, perhaps using one of the standard forms issued by the RICS or the Law Society for short-term commercial leases.
At this point, if not before, tenants should get advice from a solicitor on the provisions of the proposed lease. Apart from anything else the landlord’s solicitors act for the landlord and only have to consider their client’s interests so having your own solicitor makes sense.
Sometime the proposed lease does not correctly reflect the agreed Heads of Terms. Nowadays it is likely that a form will simply be run off the computer and will not incorporate terms previously agreed. So asking a solicitor to check the draft lease will ensure that any necessary corrections are made.
But commercial leases will contain many clauses that will not have been previously discussed. These are usually fairly standard but they can have a serious impact on the tenant so legal advice on their meaning is essential.
Many tenants who take on business leases without getting a solicitor’s advice subsequently find themselves in difficulties because of clauses in the lease which they have not understood – or even realised the existence of.
Some common problem clauses in commercial leases
Commercial leases will contain a clause stating what the property can be used for. Some landlords will insist on this being fairly narrow – e.g. just as a ladies hairdressing salon – while others may permit a wider variety of uses. The user may be limited because of planning restrictions or because a landlord owns a parade of shops and wants to ensure that businesses in the parade do not compete with each other.
So tenants will need to ensure that the user permitted by the lease actually allows them to carry on their proposed business.
If a tenant decides to change the business in any way, such as selling additional types of goods or providing different services then this may conflict with the lease. Consent may be required for a change or extension of use and if this is not obtained the landlord could take action to enforce the covenant in the lease.
Other common clauses which often give rise to disputes are the repairing covenant and a covenant not to carry out any alterations to the property.
A lease should make it clear who is responsible for maintaining and repairing the property, and who pays for this. When the premises form part of a larger building the landlord will usually be responsible for repair of the fabric of the building, with the tenant having to contribute to the cost by means of a service charge.
However the tenant will usually be responsible for maintenance of the interior (which may include fixtures, fittings, carpets and internal partitions) and if the whole of a building being leased the tenant will probably be responsible for all maintenance.
When a lease comes to an end and the tenant leaves the property the landlord may well claim that the tenant is in breach of the repairing covenant and claim the cost of putting the property back into its condition at the start of the lease – or even into a better condition! Such claims can cost tenants thousands of pounds so repairing covenants need very careful consideration.
Leases also usually restrict a tenant’s right to carry out alterations. Tenants who carry out unauthorised alterations risk being penalised by their landlord and having to reinstate the property.
But it may have been agreed in Heads of Terms that a tenant is to do some fitting-out works. The lease should then make it clear that the tenant is entitled to carry out these works. It should also state whether they will then become part of the property and therefore belong to the landlord, or whether they will remain the tenant’s property and have to be removed when the lease ends.
There will also be many clauses setting out things that the tenant must not do – some will be fairly obvious, like not damaging the building. But some may restrict trading hours or otherwise impact on the tenant’s business so will need careful study.
These are just a few of the problem areas that are commonly encountered. Even fairly innocuous- looking clauses can contain traps for the unwary.
Longer-term leases often contain rent review clauses, perhaps with a break option for the tenant to terminate the lease. All such clauses are a minefield – they require careful drafting and tenants should be forewarned of their effect.
Landlords of commercial property are far more likely to enforce the provisions of the lease than are residential landlords. So tenants must be aware of the implications of all clauses in a lease before signing up.
Investing in legal advice from a solicitor before signing a commercial lease can save expensive disputes with the landlord later on.