BGBG

Granting a Commercial Lease

Are you thinking about granting a commercial lease? Do you own a commercial property that you do not currently need? Do you own commercial property as a capital investment and want to generate income?

Are you thinking about granting a commercial lease? Do you own a commercial property that you do not currently need? Do you own commercial property as a capital investment and want to generate income?

There are two main reasons for wanting to grant a lease of commercial property that you own.  The first is that you do not need the property for your own use at the moment (but may do in the future) while the second is that you own the land as a capital investment and a commercial lease is a way of generating income from a tenant who will be paying rent.

Either way, one of your aims as a landlord will be to receive a full and proper rent for the property whilst having to do as little as possible in terms of managing the property.  A commercial lease is a very flexible way of letting someone occupy property but you must understand what a lease is if you are to maximise its value and have a good relationship with your tenant.

1. What is a commercial lease?

Put simply a commercial lease is an agreement between one party and another whereby the landowner grants exclusive possession of commercial land for a determinable period of time in exchange (usually) for the payment of rent. The key element of a lease is the grant of exclusive possession. A person has exclusive possession if it can exercise the rights of the landowner and exclude both the landlord and third parties from the land. It does not matter what the document calls itself or indeed whether there is a document at all.  A lease may still come into existence if exclusive possession is granted, whatever the parties may think they have agreed.

For more information on Granting a Commercial Lease...

Please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 for a free discussion or email natalie.hopkins@everymanlegal.com

2. Comparison with Licences

If exclusive possession is not given, then the arrangement is not a lease but a licence.  This is simply a permission for a person to do something on another person’s property that would otherwise be a trespass.  Licences are generally not acceptable for occupiers of commercial property as:

  • a licence is merely a personal right or permission so it ends when either party changes. If the freehold of the property is sold, the licence cannot continue and the licensee may find themselves without any premises;
  • a licence entitling the licensee to use the land for the purpose authorised by the licence does not create a legal estate in land. As to many businesses location is key, the fact that the licence can be ended at any time creates far too much uncertainty;
  • a licence does not give the tenant exclusive possession of the property, so most businesses will find the privacy or security implications of the freeholder being able to walk through the property or do things on it at any time to be unbearable.

Even if the parties do decide that they want a licence arrangement rather than a lease, the fact that a document is labelled a licence, does not mean that the courts will treat it as such.  Where the document has any of the following characteristics, this may indicate that a “licence” is not a licence, but a lease:

  • it grants exclusive possession;
  • it is for a fixed term;
  • it reserves a rent.

However, the fact that the “licence” is for a fixed period of time does not necessarily prevent it from being a licence, as a licence can be for a fixed term. Similarly, if the licensor is required to pay a “licence fee”, this will not necessarily prevent the arrangement from being regarded as a licence although in general such a fee tends to be regarded as rent. The arrangement has to be looked at “in the round” in order to determine its legal basis.

3. Tenancies at Will

There is a hybrid type arrangement between a lease and a licence known as the “tenancy at will”.  Such an arrangement exists where there is a tenancy expressly granted on the basis that either party may determine the tenancy at any time. It may be express or implied but in practice is hard to distinguish from a licence to occupy. Tenancies at will are often used where the parties want to document a short term occupational arrangement pending completion of the main transaction they are negotiating.  Their main characteristics are:

  • they cannot be assigned;
  • they are generally regarded as a “bare” tenure and not an estate in land;
  • they form a personal relationship between the original landlord and tenant.

This might sound simple but tenancies at will can cause problems: if not properly drawn up, what is intended as a tenancy at will, may instead be a periodic tenancy for which longer periods of notice would be required to terminate and which may attract security of tenure.

The Everyman Legal team acted promptly and with us in mind. We were treated as an important client even though the services for the transaction were fairly routine. They always went the extra mile to keep the process moving efficiently.

4. Nature of a commercial lease

A commercial lease is generally a more formal document than either a licence or a tenancy at will and brings with it various obligations on both the tenant and the landlord which need to be thought about when the lease is negotiated.

For example, a landlord is subject to an implied obligation not to derogate from its grant, which means that the landlord must not do anything (including using other land that it has retained) that makes the leased premises materially less fit for the purposes for which the lease was granted. The principle of non-derogation from grant has been described as a rule of common honesty and essentially means that the landlord cannot give with one hand and take away with the other.

5. Types of commercial lease

There are various types of commercial lease of which the most common are:

  • Headleases and underleases – a headlease is a lease granted out of the freehold and an underlease is one granted out of a headlease
  • Fixed term leases – a lease that is granted for a stated time period (known inaccurately as a “term of years”). Most leases of commercial property are commonly granted on the basis of a fixed term and will generally be a business tenancy attracting security of tenure.
  • Periodic tenancies – a tenancy that runs by reference to a stated period (a week, a month, a year), until it is terminated by either party giving notice. A periodic tenancy of commercial premises cannot be excluded from having security of tenure if the tenant is in occupation.
  • Reversionary lease – one that takes effect when an existing lease has expired or more generally, any lease where possession is delayed to a future date.
  • Contracted out tenancies – business tenancies where the landlord and tenant have agreed that the lease will not have Security of Tenure and have followed the necessary procedures to bring that into effect.
  • Institutional lease – a lease that is acceptable to a landlord that is an institution such as a pension fund or insurance company.
  • Full repairing and insuring lease (FRI lease) – an Institutional Lease in which:
    • all the repairing liabilities are borne by the tenant, with the cost of repairs to common parts being recoverable from the tenant through a service charge;
    • the costs of insuring the property and any building of which the property forms part, are recoverable from the tenant
  • New lease – a lease granted on or after 1 January 1996. The original tenant, and each subsequent assignee, will generally be released from liability on assignment.
  • Old lease – any lease that is not a “new” lease. The original tenant remains liable throughout the term of the lease, even if it has assigned its interest to a third party.

Leases defined by reference to the way in which the rent is calculated and paid:

  • Ground rent – a rent that reflects only the value of the ground and not of any building on it. Ground rents are often set at a fairly nominal level.
  • Rack rent – the full open market rent of the property. Most leases of commercial property are granted at rack rents. The “best open market rent” referred to in a rent review clause is a rack rent.
  • Turnover rent – the rent is calculated as a percentage of the tenant’s turnover at the premises.
  • RPI rent – a rent which increases in line with the Retail Prices Index.
  • Side-by-side or geared rent – commonly seen in a joint venture context where the head landlord lets land to a developer or investor who will then develop and underlet the land. The head landlord will typically receive a basic ground rent and a share of the income from the underleases.

Our dedicated team of solicitors, based in Witney, Oxfordshire, would be happy to answer your questions.

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6. Lease advantages and disadvantages

Once agreed, a lease has certain advantages over other arrangements:

  • Upon the expiry of a lease it should be clear if the landlord is entitled to possession of the premises and on what basis. The landlord will be protected from spurious claims by a tenant that it can remain in the premises following lease expiry. These can be expensive and time consuming to defend and can delay the landlord’s development plans for the premises.
  • A lease confers a secure period of income for the landlord.
  • Flexibility for both parties can be introduced into the lease by the insertion of a mutual rolling break clause.
  • A lease offers security and certainty for the tenant as an occupier of land. The landlord generally has limited rights of access.

The disadvantages of a lease are that:

  • Leases (even for a short term) tend to be longer documents than a licence to occupy or a tenancy at will. It takes more time to negotiate the terms and document them.
  • The costs associated with producing a lease are likely to be higher than those associated with producing a licence or tenancy at will.
  • SDLT may be payable on the lease.

Conclusion

A lease is a flexible document which can be adjusted to suit the parties’ needs.  However they can also be used to give one party an unfair advantage.  All parties to a lease should be aware of what they are required to do under the lease and what are the duties of the other parties.