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The 5 most important terms to consider when taking a new commercial lease

If you are thinking about taking a lease of a commercial property then it is really important that you understand all of the provisions with that lease. Your lease will contain numerous obligations, covenants and restrictions and you can easily fall foul of its provisions if you are not clear on exactly what the lease says and means.  There are some clauses in a commercial lease which can cause more problems than others. Here are the top 5 most important terms to consider when taking a new lease:

  1. Payments due to the landlord

The rent provisions within a commercial lease will almost inevitably fall in favour of the landlord. These will set out the amount due, dates for payment and method for payment.  If you do not make the payment date, the landlord may immediately have the right to charge interest (at least 4% above base rate), to seize your goods and equipment or to take the property back from you, ending the lease early.

There may be other payments due under the lease including charges to recover insurance premiums paid for by the landlord (normally payable “on demand” which means as soon as it is requested from you) and maintaining facilities shared with other tenants.

If a payment is variable, you need to be certain that the variation has no unexpected consequences.  A rent which doubles every year will soon outstrip inflation and produce figures which no tenant will ever be able to pay. Service charge provisions should set out services to be provided by the landlord, service costs that can be recovered and your proportion of those costs, perhaps subject to a cap.

  1. Keeping the property in repair

It will inevitably be the tenant’s obligation to keep the property (or at least the interior of the property) in repair.  If a landlord has to do work themselves (i.e. to the exterior of a building you share with other tenants) they will want to pass the cost onto you via a service charge.

A landlord will usually want the premises returned at the end of the lease in perfect condition. If you agree to a full repairing obligation within the lease, you can end up with a repair bill running into thousands of pounds when the lease ends, even if the disrepair pre-dated the lease or the lease was for a short period.  The repairing obligations can limit your duties to keeping the property in the same condition it was in at the start of the lease but this must be agreed at outset. Unsurprisingly, landlords usually insist that the tenant pays for drawing up the schedule recording the condition of the property at the start of the lease.

  1. Assignment and Sub-letting

A lease allows a tenant to occupy the property for a set period of time and both parties are bound by their obligations for the full term (length) of the lease.  A tenant cannot simply decide that it does not need a property anymore and hand it back.

To give a tenant room for manoeuvre, it is usual for a tenant to have the right either to transfer the commercial lease to someone else (called assignment) or to sub-let it, as long as the landlord approves the new occupier and you pay the landlord’s costs of giving that approval.

Assignment of the lease is the best way to dispose of it but you will retain residual duties if the new tenant later defaults on the lease.  You may find yourself having to take back the lease and pay off any arrears or costs incurred resulting from the defaults of the person you chose to take over the lease.

If you sub-let the property, your duties to the landlord continue unchanged but you will have passed their compliance onto your sub-tenant.  Crucially, however, you retain control of the premises and, if the sub-tenant defaults, you can take action yourself to limit your liability.

Either way, it is important that you carefully vet anyone to whom you intend to dispose of your commercial lease.  If he is a “man of straw”, you may find yourself with a large and unexpected bill to meet!

  1. Landlord’s duties

Just because a landlord can charge you to do work does not mean that he is required to do it when you want or to the standard that you expect.  Whether it is a duty to repair the drains or insure the premises you must ensure that the terms of the lease include what you want them to say.  If the lease does not oblige the landlord to do something then in general terms you cannot force your landlord to do it.  If there are no restrictions on how he does it he can choose the most expensive or least effective way of doing it too.

  1. Early termination clauses

You can have a provision in a commercial lease which allows you to end the lease early but the courts have held that a tenant must strictly comply with its terms for it to be effective.  At its most extreme, they have said that if the lease provides that a notice must be on green paper, a break clause cannot be operated by serving a notice on yellow paper even if the content is correct.  Landlords like to hedge around such clauses with conditions but it is arguable that even the most innocuous condition such as one that the rent is paid up-to-date effectively prevents a tenant from exercising the break.  Trying to persuade landlords not to include such conditions is almost always an uphill struggle though.

As a final note, the courts have said that the mere fact that a commercial lease is unfair is not a ground to change it.  If you sign up to a commercial lease then you will have to live with the consequences so it is worth negotiating thoroughly on its terms before you become committed. Legal advice should also always be sought.

For further information please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com