These notes are by way of preliminary and general explanation.  We advise, very strongly, that you should take legal advice from a solicitor, whether you are a prospective landlord or tenant.  Most commercial leases contain a large number of clauses, each dealing with a separate item.  The wrong strategy on any one of those items could cause a disaster.

 

The free advice notes on instructing your solicitor apply to this section as to any other.  You can find a link to the Net Lawman article on 'Instructing your solicitor' at the end of this article. Landlords are property professionals.  As a result, the balance of property knowledge favours the landlord.  Landlords are generally able to dictate terms with very little margin for the tenant or his solicitor to change them.  One such term is the provision that the tenant should pay the landlord's solicitor's legal bill.  This is an unfair relic from long ago, but many landlords still make it a term of the lease.  By far the best way for a tenant to avoid paying the landlord's solicitors is to make quite clear with the landlord or his surveyor agent when the deal is negotiated, that your offer to take the property is subject to your not paying the landlord's solicitor's charges.  By doing this the tenant transfers the decision as to whether or not to accept from himself to the landlord.  Psychologically a landlord is thus more likely to accept.  Because so many tenants do now refuse to pay landlord's solicitor's costs, the landlord is unlikely to feel particularly aggrieved.  It is just a question of "some you win, some you lose".

 

A landlord’s solicitor will often present a tenant’s solicitor with a draft business lease of enormous complexity, accompanied by an abrupt statement that no amendments will be permitted. This puts the tenant’s solicitor in a difficult position. Should he write a 5,000 treatise for his client on all the things that might go wrong if amendments are not made where appropriate, or does he go to a great deal of time and trouble in considering the amendments and drafting them, even though he has been told specifically that none will be accepted? Or does he “take instructions”?

 

Most prospective tenants are not prepared to withdraw from a transaction which has already cost them time and  money, and in respect of which they have probably made commercial decisions from which it would be difficult to withdraw. The landlord is perfectly aware of that. However, the landlord is also aware that if there are features of the lease, which may cause serious problems for the tenant, then he will know that the tenant’s solicitor will have a professional obligation to recommend to his client that the deal should not go ahead. The result of this power struggle is that  the  tenant’s  solicitor is  likely  to  make such  amendments as  he  feels  are  absolutely minimally necessary, taking his client’s instruction not only on the main commercial items in the lease, but on any more obscure legal points where no change has been proposed.

 

The landlord’s solicitor will produce a draft business lease. If the transaction is substantial, and particularly if it is a one-off, then he may well start with a “heads of terms” document so that the main commercial elements can be agreed between all parties before time is spent drafting a comprehensive lease.

 

At different times in the economic cycle of Great Britain, the landlord or the tenant may have the upper hand. When times are booming and everybody wants new premises, a landlord will be far less likely to accept substantial amendments to his draft lease than when times are bad and he is desperate to obtain the letting. Tenants also often fail to appreciate that a landlord may want to either borrow against the “investment” created by the tenant’s occupation, or alternatively to sell it. The landlord is therefore concerned to maximise the commercial value of the lease. There are many provisions in a lease which may not put the tenant at serious risk, but which do improve the commercial value of the property. Thus, when a landlord’s solicitor insists on terms that help him create an “institutional quality” lease, the tenant should realise that he has some bargaining power.

 

Because leases are long and complicated documents, there is enormous scope for argumentative lawyers to push drafts to-and-fro over many weeks. Nothing focuses a solicitor’s attention on the time taken so much as the proposition that he, and not his client, is paying for it. A fixed price quotation is therefore a splendid incentive to complete your lease efficiently.

 

Another excellent way to reduce legal costs, whether you are a landlord or a tenant, is to consider all of  the main commercial elements of a lease in some detail, and agree them before  the details go  to solicitors at  all. This  may mean additional  work for  the selling surveyor, but  since  he is  working on a fixed fee for the landlord, this additional work will cost neither party any money.

 

 

Extent of the property - Agree the plan. Landlords will avoid future problems and arguments if they go to the small expense of obtaining a proper conveyancing plan clearly identifying the areas precisely.  A good conveyancing plan also enables the tenant and his solicitor to deal quickly and efficiently with searches, and perhaps to avoid the written correspondence that arises from uncertainties and misunderstandings in a bad plan.

How many years for the lease?

 

The term of the lease is critically important for both parties.  Subject to appropriate rent reviews, the longer the term the greater the value to the landlord.  If a landlord wishes to borrow money against the security of the lease, the bank will be unlikely to consider a proposal with a lease of less than five years.  A tenant might need a long lease in order to justify high fixed costs or machinery installation, or he may prefer a short lease so that his obligation to pay rent does not hang over him for longer than minimally necessary.

 

A tenant may be able to insist on a "break clause" - that is a provision for the tenant to give notice, at some particular point in time, to terminate the lease then or shortly afterwards.  In that way the tenant has the benefit of as long a business lease as he chooses, but without the risk that he will want to move on and be stuck with the rent payment.  Whether or not a landlord is prepared to accept a break clause depends on the importance of the transaction generally.  A landlord presented with a break clause proposal should point out the reduction in the capital value of his property, which follows and ask for a higher rent to compensate.

 

Rent - Rent is generally calculated in £s per square foot or £s per square metre.  The landlord will often specify a particular round sum when a property is advertised.  Like all terms of the lease, the rent is a matter for negotiation.  It is very helpful to both parties if the landlord has prepared an accurate scale plan of the interior of the property, from which measurements of the areas can be taken.

 

Rent review - If the lease is for longer than a few years, the landlord should insist on a review to bring the rent into line with rents as they are at that future review date.  The less frequent the reviews, the more the tenant benefits by not having to pay the inflationary rise in rent until the review date.  Most rent review provisions allow for "upwards only" review.  Occasionally this can prejudice a tenant.  However, failure to include this provision would reduce the value of the property to the landlord, because a prospective purchaser or lender would not be able to count on the current rent remaining payable beyond the review date.

 

Responsibility for repairs and property maintenance - If the cost of the business lease justifies it both sides are strongly recommended to rely on professional surveyors to negotiate repairs terms.  If surveyors are not involved, the landlord and tenant should sit down and make a written list of items with the repairs responsibility marked against each.  Without doubt, one of the most fruitful sources of property litigation concerns liability for repairs.  A tenant coming into a comparatively new property should understand that the landlord might have little scope for negotiating on the question of repairs, particularly if he is the developer. Where older buildings are concerned, it is more important to the tenant that he is not saddled with an unreasonable liability.  An obligation to pay £20,000 for a new roof at the end of a three-year term, at a rent of £5,000 per year, could be quite painful.  Both sides should remember the benefit of a "schedule of dilapidations".  Jointly appoint a surveyor to provide a list of all the deficiencies in the building.  If it can then be agreed that the tenant has no obligation to improve the building beyond the state set out in that list, then both sides have a fair deal.

 

Is the tenant allowed to assign or sub let? - There are sound legal reasons why a landlord should not permit sub-letting.  If a proposed business lease is to someone whose business requires occupation of smaller parts by others, then he could insist that the tenant uses license agreements rather than sub-leases to deal with the downstream occupation.

 

Assignment is where the tenant transfers the balance of his lease term to someone else.  A tenant should understand that a landlord has accepted his package terms knowing the person with whom he is contracting. If the tenant is completely free to assign, then the landlord could find he has given consent to an assignment for someone who fails to pay the rent.  The tenant however, really has to be able to part with his interest if he should need to do so.  Both sides should therefore consider carefully the extent to which they might need to protect their rights on this question.  It is likely to be concluded on the basis that the tenant is allowed to assign, but only subject to safeguards for the landlord.

 

If the person to whom the tenant assigns fails to pay the rent, the landlord can still come back to the tenant and ask him for the full rent.  When the assignee himself assigns, then the original tenant is totally free of obligation.

 

Planning use - As well as checking with the local authority that his proposed use is lawful, the tenant should make sure that the landlord knows exactly for what he intends to use the building, and that it is approved.  It is important that a tenant considers his future requirements here.  It is very easy to change the direction of a business and find you fall foul of your business lease.  For example, a manufacturer may not at first consider that he might want a cash and carry or factory shop division a few years later.  Alternatively, a tenant may want to dispose of the lease to someone who wants to use the building for a different purpose.

 

The question of user is of course more important in longer business leases where the use is much more likely to change over time.  Solicitors for landlords who do not have much property valuation knowledge, frequently fix the use clause narrowly - perhaps with the thought that if the tenant needs to change the use in any way he will have to come back to the landlord, and perhaps pay a fee or more rent for the privilege.  He misses the point however that at a rent review the new rent will be calculated by reference to the rack rent (then current rent) payable in the open market.  Clearly, a theoretical open market value would be lower if the number of potential tenants is fewer.  A landlord should therefore think particularly carefully before imposing a use restriction, which limits a change to a use, which in fact provides a higher rental value.

 

Other terms - Net Lawman will advise on these and all other terms, either to be proposed for a landlord, or considered by a tenant. To contact: miriam@netlawman.co.uk

 

Remember, on a lease over seven years, it is now mandatory that you make sure that it contains ‘prescribed lease clauses’ at the top of the agreement. All Net Lawman documents provide for this and explain how to complete the clauses. The PLCs have been designed to speed up the registration process at the Land Registry office. For more information, please read our articles on Prescribed Lease clauses (part one)(part two).

 

If the lease is governed by theLandlord and Tenant Act 1954, and most leases are, the tenant has a right to security of tenure. This simply means that they have a right to continue using the property and renew the tenancy on the same terms so long as neither of the parties objects.

 

Under the new Regulatory Reform Order 2003, a landlord can only refuse to continue the tenancy if the tenant has done one of a few things (see our article on Security of Tenure for full details). One example might be that the tenant failed to make regular payments.

 

If the landlord is happy for the tenant to continue in occupation under the terms of the original lease, he should serve a ‘section 25’ notice to that effect.