A Tenant’s guide to Commercial Tenancies

 Once a tenant has decided to proceed to acquiring a commercial lease, formal negotiations to agree the Heads of Terms begin. The Heads of Terms set out the principal terms which will guide the form of lease to be entered into and form the basis for our drafting of any new lease. Below is a summary of some of the key terms which would be included:

The term is the length of the lease, whether this is for one year or twenty. A tenant should be mindful that there are options to build in flexibility to the length of the term. This could include the right to end the lease early (breaks rights), an option to acquire a longer lease or freehold interest in the property (options). A tenant should also consider security of tenure under the Landlord and Tenant Act 1954. This is the right to remain in the Property at the end of the term and can be a valuable protection on a longer lease to preserve goodwill in a tenant’s business.

Rent and Premium
The way in which the tenant pays for the lease will vary according to the lease length. A longer lease (99 years for instance) is likely to attract a premium payable upon completion with a small rent to be paid alongside.  A shorter lease is likely to have rent payable by the tenant and no premium. In order to entice a “good” tenant or a tenant who will have to spend time fitting out the Property, the landlord may also offer a rent free period of a few months.

Leases whose term is 5 years in length or above will be likely to have a form of periodical rent review. This is a mechanism by which the rent is altered during the term. The rent can be increased by set amounts incrementally (agreed before the grant of the lease), reviewed and amended to the level of market rents of comparable properties (so can rise or fall) or the higher of the previous rent and market rent (upwards only). The most common type of rent review is an upwards only rent review.

Repair and decoration
Repairing obligations place a considerable financial burden on tenants and it is important for a lease to be clear about the repairing obligations imposed upon a tenant as well as the Landlord. Where appropriate tenants should ensure their obligations are to keep the property in no better condition than when they found it (a schedule of condition). Tenant’s should also be clear about what part of the property they are to repair. The distinction can be as simple as interior for tenant and exterior, conduits and communal areas for Landlord. However, the extent of the responsibilities can be negotiated. The tenant may wish to take on all interior repairs but exclude the window frames for example.

Assignment and subletting
If the business needs of a tenant change, it may wish to vacate the property or share possession with another party. A tenant should consider whether it will need the ability to assign the lease, grant a sublease of whole or part of the property, or share possession with a group company. The Landlord may agree to such provisions but may require that his consent be given on each occasion.

A tenant may wish to make internal (and external) alterations to the property to fit in with its business needs. The landlord may allow certain alterations to the property and allow a tenant to erect a sign outside of the demised property but normally a landlord’s consent is required. The tenant must also be mindful of the planning implications as any alterations may affect the planning permission for the property or require building regulations approval.

Service charges
If the target property is subject to a service charge, the service charge will be collected by the landlord or management company to pay for any services they will carry out. Some services must be performed whereas others are discretionary. The charge is likely to be collected in advance in accordance with an estimate provided to the Tenant. The Tenant will pay a fair or quantified proportion of the sums due and will have to pay any excess to the Landlord.  The tenant should consider the arrangements in place particularly with regards to the services it and other tenants use and the proportion of the costs charged. A tenant may wish to consider a service charge cap to add certainty to the cost and to prevent the tenant being responsible for a proportion of very expensive capital expenditure such as the replacement of the roof of the building.

This guide has discussed a number of issues which arise when negotiating commercial leases. We hope it is helpful in raising a few issues which you may not have been aware of. If you have any queries or want to find out more about commercial leases, please contact Daniel York, Partner, Real Estate department.

Daniel York
Partner, Real Estate
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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