Top 5 things every commercial tenant needs to know
- Renewal
Some leases contain specific contractual rights of renewal, obliging the landlord to grant a new lease, provided that the tenant serves the proper notice of intention to renew. These are rare. Often, business tenants will be reliant on rights that were given to the majority of business tenants in legislation more than 65 years ago, but which do not give an absolute right to renew and require a particular procedure to be followed. Irrespective of whether there are such rights, business tenants are free to negotiate with their landlord and enter into a new lease voluntarily, without going through any statutory processes, and this is the case with most lease renewals. Business tenants should typically consider what to do about a lease renewal around 18 months before expiry.
- Rent review
Most commercial leases contain some form of rent review, which tend to be at 3-5 year intervals and on a market rent review basis. Review clauses usually allow the rent to rise up to the current market rent, but if the market rent has fallen, the rent stays as it is. This is known as an “upwards-only review”. Other methods of rent review include fixed increases or setting the rent according to fluctuations in the retail prices index or consumer prices index, to allow for inflation. Inflation-based rents can be attractive to retail businesses, assuming that any increases in the rent can be passed on as price rises to customers and clients – not that this is always possible!
- Early Termination
What do you do if you’re slightly behind on the rent, turn up one morning and your landlord has changed the locks? Nearly all leases include a “forfeiture” or “re-entry” clause. This is every tenant’s nightmare, but there are some important protections that the law puts in place to help.
First, if the lease includes property with a residential element, such as a flat above a shop held on a single lease, occupiers of that residential element are protected from having the property forfeited without an application to Court and an Order for forfeiture/possession being made. No Court Order means any forfeiture is void and you would be able to request the keys to those new locks – there may also be other claims possible for unlawful eviction.
Second, as long as you act quickly and can pay the arrears, an emergency application to Court for “relief from forfeiture” could lead to the lease being reinstated.
Third, your landlord may be prepared to voluntarily grant you a new lease as long as you pay the arrears, the costs of entry to the property, the legal costs of the forfeiture and new lease and put down a rent deposit to secure the landlord against future losses from a reoccurrence.
The second and third options are not cheap, and accordingly the best advice if you wish to carry on trading and can do so profitably is not to fall into arrears in the first place and if you fear you might, have the conversation with your landlord early, to try and agree time to pay, or some other settlement.
The Government’s rules on possession of commercial properties following the Covid-19 pandemic are still unwinding, and old Covid-related arrears may not entitle the Landlord to take possession.
- Break rights
Over the past decade or so, it has become increasingly common for commercial leases to include the right for a tenant to break the lease early. Such rights do contain traps for the unwary. The first of these is on commencement of the lease and relates to Stamp Duty Land Tax. If the intention is only to take a short lease and the premises are quite substantial, taking a longer lease with a break right could incur a liability for Stamp Duty if the combined rents over the whole lease exceed the minimum threshold (currently £150,000.00) with an allowance for inflation each year. Exercising the right to break the lease early does not lead to a Stamp Duty refund.
The second potential risk for a tenant relates to the preconditions on exercising a break right. Often the time limits are interpreted strictly, i.e. if at least six months’ notice is required then at least six months is what must be given. Other preconditions are that break notices need to be served on the landlord at a particular address, or that there need to be no arrears of rent (and sometimes other payments) and 100% compliance with the other terms of the lease. There can be significant benefits in taking advice on break rights before the heads of terms are settled with the agent or direct with the landlord and in some cases, considering whether you need a break right at all. With a successful business that is not necessarily reliant on market conditions, there can be a premium in the rent payable for having a break right, just the same as for any other favourable right in the lease.
- Repairs
Leases differ over whether parts of the property such as shopfronts, windows, window frames, doors, foundations and rooves, and pipes, wires, cables etc. are within the extent of the property or not. This can determine who is responsible for the repair of such items and as well as whether there are any alterations permitted in future.
It is also important to consider the standard of repair that is expected by the landlord when handing back the property, or indeed whilst the lease is continuing. The majority of leases allow for a landlord to instruct a surveyor at the tenant’s cost to visit the property at any time to ascertain if the tenant is looking after the property. The surveyor will be guide by the standard of repair set out in the lease. An obligation to keep the property in good repair means that it must be put into good repair even if the condition is not perfect at the start. Imagine a situation where the extent of the property included all structural walls, foundations and the roof, and it was already in a dilapidated state when the lease commenced. What liabilities would you, as a tenant, be taking on in addition to paying rent, business rates, utilities and the various costs of running your business. Could your business cope with a major budget shock.
Even if the extent of the property does not include the structure, these items may be shared with other properties and a contribution may be required towards their maintenance. Again, a wary tenant will build a professional team, including a competent surveyor and experienced solicitor to guide them as to their responsibilities and look to renegotiate with the landlord if the risks are likely to be too great for the tenant’s business.
This “top 5” could so easily have been a “top 20”. Commercial leases are notoriously lengthy and complex documents and there are very few areas in which the general law will protect a commercial tenant, so it becomes vital to make sure that the lease is specifically tailored to the needs of the landlord and tenant. The array of compromised solutions available from accumulated knowledge that can be essential in winding a path between the interests of the landlord in being able to re-let the property at the end of the lease, and of the tenant in having sufficient, uninterrupted rights to use the property and some form of budgetary constraint. This is where we can help.
dstanton@rawlinsdavyreeves.com / 01202 674425
