A Tenant’s Guide to Business Leases
07 March 2014
The first draft of a business lease will be prepared by the Landlord’s Solicitors and, as a result, usually contains “Landlord-friendly” provisions which maximise the Landlord’s control over the premises and ensure that the costs associated with the premises lie firmly with the Tenant. It is therefore essential that a Tenant obtains legal advice before entering into the Lease and in almost all cases the Tenant should find that the cost of legal advice is far less than the expense of complying with the un-amended provisions of the Landlord’s Lease!
This overview should help tenants understand some of the important issues that will need to be settled with the Landlord whether the tenant is taking a lease of a single floor in an office building or of a whole building.
In addition to the annual rent and building Insurance, what else will the Tenant be required to pay for?
|Where the Tenant is taking a lease of part of a building, the lease will contain provisions for the payment of service charge. Details of the current service charges will be provided by the Landlord but this amount can vary and the Tenant should always seek to agree a cap on the service charge in order to budget for its outgoings over the term. Any service charge cap that is agreed is likely to be subject to annual increases, usually in line with Retail Price Index increases.
|Where the Building has been elected for VAT by the Landlord, this will be payable on the rent and service charge.
|Rates and Other Outgoings
|The Tenant will be liable for business rates and utilities.
|In most leases of more than five years the Landlord will require a review of the rent. Historically, the review of rent has been “upwards only” which means that the reviewed rent will only increase, or, in the case of a depressed market, remain at the same level.
|Stamp Duty Land Tax (SDLT)
|Depending on the amount of rent/premium payable under the Lease (and any VAT which is due) the Tenant may also be liable to HMRC for SDLT. SDLT is a compulsory tax payable within 30 days of completion of the Lease.
|Land Registry Fees
|Where the Lease is granted for a term of more than three years, it will be necessary to register or note the lease at Land Registry.
|It is a standard term of business leases that the Tenant will be responsible for the Landlord’s legal and surveyor’s fees when the Landlord is asked to provide its consent to anything under the Lease (e.g. alterations to the property or assignment of the Lease to a third party).
The length of a lease will vary depending on the circumstances. A typical short lease will be granted for three or five years but longer leases are often granted for ten years.
Option to Determine (Break) Clauses
For leases longer than five years, the Tenant should consider including a Break Clause. The clause will usually require that at least six months’ prior written notice is given to the Landlord but the Tenant should resist any other conditions, such as payments of rents or compliance with the tenant covenants, as these give the opportunity to the Landlord to challenge the validity of the break.
Security of Tenure
The provisions of Part II of the Landlord and Tenant Act 1954 mean that, at the end of the term of a business lease, the Tenant will have an automatic right to renew the lease unless the Landlord can prove one of a limited number of grounds (including redevelopment of the building or the Landlord wanting to acquire the premises for its own use). The Landlord will often attempt to exclude these statutory rights but this should be resisted by the Tenant.
A phrase often used is “FRI lease”. This means that the lease imposes a full repairing and insuring liability on the Tenant. Usually the tenant’s obligation will be to carry out the repairs and to reimburse the Landlord for the cost of the insurance. In leases of part of a building, the Tenant will be responsible for repairs to the internal parts of the premises and will contribute towards the cost of repairs to the external parts via a service charge. It is always advisable to have a surveyor assess the premises (and the building) to establish whether major repairs are likely to arise during the term.
Schedule of Condition
If the premises are not in a good state of repair at the start of the term, the Tenant should require that a Schedule of Condition is attached to the Lease. This evidence, which may be photographic of items of disrepair will then be used to limit the extent of the repairing obligations to no better than the condition the premises were provided in at the start of the Lease.
At the end of the term the Tenant will need to leave the premises in the condition required by the Lease. If there are any dilapidations (lack of repair) the Landlord will either require the Tenant to make the necessary repairs or will carry out repairs itself and pass the charges for this to the Tenant. The Tenant should seek to limit its obligations in relation to dilapidations in a lease of less than five years.
Business leases will usually restrict the tenant’s ability to assign (transfer) or sub-let. The Landlord’s consent will be required and the Landlord will usually impose conditions. The Tenant will need these provisions to be as flexible as possible to accommodate its future business needs.
Authorised Guarantee Agreements (AGA’s)
Where the Tenant is looking to assign the Lease, the Landlord will almost always require the Tenant to enter into an AGA. This means that the Tenant will stand as guarantor of the assignee’s performance of the obligations in the Lease. The Tenant would be well advised to assign the lease to an assignee who can demonstrate sufficient financial strength to meet these demands.
Group Company Sharing
If there is a possibility that the Tenant will want to share occupation of the premise with a group company (i.e. a company in the same group of companies as the Tenant) at some point during the term, provisions for this need to be included in the Lease at the outset.
If the Tenant will need to carry out alterations to the premises before it can use them, plans showing these alterations should be submitted for approval as soon as possible. Obtaining the Landlord’s consent to alterations after the grant of the Lease will mean that the Tenant has to pay the Landlord’s legal and surveyor’s costs, in addition to its own. It is worth noting that the Landlord will usually ask that any alterations are reinstated at the end of the term and the Tenant should attempt to carve out from this obligation any of the alterations which are improving the premises.
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