Key Considerations for Tenants before signing a Commercial Lease
12th April 2023
When agreeing terms of a Commercial Lease with your Landlord, some matters such as rent, the extent of the property being let and the term of the lease are ordinarily addressed, however often other equally important terms are not addressed in the level of detail they should be.
Below is a note of key matters tenants should also consider, ideally before terms are agreed with the landlord and certainly before the lease is signed. The list is not exhaustive.
The lease may authorise that the use of the Property, but this does not mean that the Property has the correct planning use. Tenants are advised to investigate whether the property has the planning use that they need it to have to operate their business. If it does not, the tenant will need to agree with the landlord that it can apply for planning to change the use and an agreement for lease should be entered into the agreement for lease would be conditional on planning so that if planning is not granted the tenant is not compelled to enter into the lease. Tenants are advised not to enter into leases until the planning use is clear. Having an incorrect planning use can lead to enforcement action being taken by the local authority thus preventing a tenant’s desired use of a Property yet a liability to pay rent.
End of the Term
The most common way a lease will end is on the contractual expiry date whereby, the tenant will vacate the property. However, the Landlord and Tenant Act 1954 is legislation which gives a tenant, occupying a property for business purposes, a statutory right to renew their lease on similar terms to their existing lease. The landlord can request that the lease is contracted out of the Landlord and Tenant Act 1954, so it is important that you consider your rights as a tenant prior to entering into a lease. If, for example, you have plans for growth expansion and future sale of your business a protected tenancy is the more attractive option to a proposed buyer.
Stamp Duty Land Tax and Registration:
A grant of a lease may trigger the payment of SDLT and/or as registration. This will depend on the length of the lease, the amount of the rent or premium.
The amount of SDLT can increase if VAT is payable on the rent. HMRC will calculate SDLT on the amount of rent including VAT. This may be additional expense which a tenant has not factored in.
Where a lease is for a term of more than 7 years it will be compulsorily registerable at the land registry. The obligation to register also applies to reversionary leases even where the term is less than 7 years, where the term start date is more than three months after the date of the grant of the lease.
Where there is an open market rent review clause in the Property, rent will be reviewed on the various assumptions and disregards which should be reviewed by your surveyor. Improvement works that you carry out should be disregarded on rent review as the landlord should not benefit from an increased rent as a result of the Tenant making improvements to the Property. Furthermore, any alterations should also be disregarded. The assumptions and disregards should be drafted on the basis that they are fair to the Property they refer to as at the date of grant.
Leases are often drafted on a “full repairing basis”. This means the landlord can ask you to return the Property in a better state than it was in at the time of the grant of the lease. You and your surveyor should inspect the Property to ascertain the state and condition of the Property and where the Property is in an inadequate state of repair, a schedule of condition recording the state of repair should be included in the lease. This will limit your repairing obligation and thus you will not have to return the property in any better state than evidenced by the schedule of condition. Landlord’s will try and resist this point but where required it should not be conceded.
Tenants ought to ensure that the Property has a minimum energy efficiency rating of E. As of 1 April 2023 all commercial premises (unless exempt) need to have a minimum E rating in order for the landlord to be able to lawfully let the property. It is envisaged that the minimum standard by 2023 will be at level C and level B by 2030. Tenants should therefore ensure that there are clauses in the lease stating that improvement works in relation to the EPC ratings are carried out at the Landlord’s cost and not the Tenants.
Sharing occupation of a leased property
A commercial lease should clearly set out a tenant’s ability (if any) to sell its lease to someone else, sublet or share occupation of the property with a third party. Unless this is a key part of your business model you may not give it much thought when signing up to the lease however, circumstances can change over time and it is advisable to clearly understand your options to assign, sublet or share occupation of the property.
Break clauses allow you to terminate a lease at a certain time during the term provided you have given notice as required by the Landlord. Break clauses often come with tight restrictions so you must ensure that at the Break date you are able to comply with those restrictions. For example, the requirement to deliver with vacant possession is extremely difficult to comply with. There is extensive commentary and case law surrounding this. It is essential that a break clause contains a requirement for the landlord to refund any overpayment of rent from the Break Date to the next Rent payment date to ensure you are not out of pocket.
End of the Term
The most common way a lease will end is on the contractual expiry date whereby, the tenant will vacate the property. However, the Landlord and Tenant Act 1954 is legislation which gives a tenant, occupying a property for business purposes, a statutory right to renew their lease on similar terms to their existing lease. The landlord can request that the lease is contracted out of the Landlord and Tenant Act 1954, so it is important that you consider your rights as a tenant prior to entering into a lease.
Our advice to any potential tenant is to give a great deal of consideration to terms of the lease and matters highlighted above before entering into the lease. A lease is a liability which will run for a number of years so it is important that the terms are acceptable and correct for all parties. Please contact our experienced Commercial Property team.
Article written by Commercial Property Solicitor Bejul Lekhani-Lever