Considering Leasing Commercial Property
Posted on Feb 03, 2014
20 Tips for those considering leasing a commercial property.
Ken Gray, our Commercial Property Partner, notes 20 useful things that any prospective client should be aware of when considering leasing commercial property:
- If you are leasing premises to a third party ensure that you know exactly who your tenant is. Only the named tenant is responsible for the tenant's obligations. This is particularly important when dealing with a company – it is not the holding company or the shareholders who are responsible. Consider whether you need a guarantee.
- If you are a tenant, make sure you know the extent of the premises you are leasing. Don't assume that what you are shown is what you'll get.
- Scots and English law differ. In Scottish leases, the Landlord and Tenant Act 1954 – under which an English tenant often has the right to renew his lease – does not apply.
- Have the premises been surveyed? – as the tenant you will be responsible for maintaining and possibly renewing the premises. The common law obligation on the landlord to keep the premises "wind and watertight" is expressly overridden in the vast majority of cases.
- Think carefully about the total cost of entering into a lease – the rent is only the beginning. The tenant may also have to pay a service charge or a management charge. A service charge is the repayment to the landlord of money paid out on the premises during the year. The management charge is levied by the landlord for managing the premises.
- You could try to negotiate a free rent period when fitting out and decorating leased premises before starting trading.
- Rent reviews in leases are designed to increase the rent to a level, which safeguards the landlord's investment in the premises. The lease will outline the basis of the review.
- Take care that when rent is reviewed it should not be affected by the value of any improvements made to the property.
- If there is disagreement over the level of reviewed rental, it can be referred to a surveyor acting independently as an arbiter or an expert.
- Before starting alterations check the lease. As well as obtaining the landlord's consent (if required), try to agree what can, or must, be removed on or before the lease ends. The landlord may be able to insist on the property being reinstated to its original layout at significant cost.
- The tenant will usually reimburse the landlord for arranging insurance cover on normal commercial competitive terms. Details of insurance premium and excess, which apply, should be checked to ensure the level of each is appropriate.
- Ensure that you know what risks are covered by the landlord's insurance. If damage is caused by a risk which is not insured, the tenant could become responsible for repairs and may have to continue paying rent. It may be prudent to have top-up insurance if particular risks are not covered by the landlord.
- If damage is caused by insured risks the landlord should be obliged to reinstate the premises within a stated period (usually 2 or 3 years) when rent is suspended. The tenant should be entitled to terminate the lease if reinstatement not completed in time.
- Check the provisions in the lease regulating the terms under which the tenant's interest in the lease may be assigned or the premises sub-let. In the absence of express provisions to the contrary, a tenant of an unfurnished urban lease is free to assign/sub-let.
- Joint and several liability of the outgoing tenant following a permitted assignation is only possible if there is express provision to this effect in the lease.
- Where there are common areas (e.g. car parks) the tenant should check the service charge provisions in the lease and service charge bills. The tenant should contribute to maintenance and repair of the common areas and not capital costs for additional/improvements unless agreed. Facilities covered by the service charge can also include cleaning, security staff and advertising or promotions – ensure costs likely to be included are known.
- Where a Standard Security has been granted (usually to a bank) the borrower must obtain the creditor's consent for any letting (Including sub-letting).
- The law gives certain protections to tenants. One is that, in the case of monetary irritancies (forfeitures), the landlord must, after the irritancy has been incurred, give the tenant a further fourteen days written notice (served by recorded delivery) to pay arrears. Only after fourteen days can a landlord proceed to enforce the irritancy.
- For a lease to be effectively terminated, a notice to quit must be served timeously by either landlord or tenant. If notice is not served, tacit relocation may take effect. This amounts to implied consent to the renewal of the lease. If the original term of the lease is for a year or more, renewal will be for a year. If the original term is for a term shorter than a year, the tacit renewal will be for the same period.
- The maximum length of a lease is now 175 years
Ken Gray, Partner, Commercial Property.