Article reference: UK-IA-LSE03

An introduction to business leases

This article is a general introduction to business leases. It includes information about leases and licenses, the registration process, as well as other related factors.

 
 

Contents

Terminology

Leases and licences

Lengths of leases

Excluding security of tenure

Registration and prescribed lease clauses

Allowed uses

Key terms

Stamp duty

 

Terminology

Leases and tenancy agreements

A lease and a tenancy agreement are the same thing. The words can be used interchangeably. Generally, statute law (passed by Government) refers to residential leases as tenancy agreements, and leases for all other types of property as leases.

An exception to this is the use of "farm business tenancy agreement" to mean a lease regulated by the Agricultural Tenancies Act 1995.

Business leases and commercial property leases

We make no differentiation between these two terms. Some people like to use "commercial property" to mean property where trade is carried out (e.g. shops) and some people like to include offices in the definition as well. We use "business property" and "commercial property" interchangeably to mean any property not used for residential purposes.

The term of a lease

The "term" is the length of time for which the lease lasts. The term is usually "fixed" for a certain length, e.g. 5 years, after which occupancy can continue on a "periodic" basis (for example, month to month or year to year). One of the features of the right to security of tenure (covered later in this article) is that when the fixed term expires, rather than the tenant having to vacate, instead the lease becomes periodic.

The law governing leases

There are many statute laws regulating leases. The most important ones for commercial property are the Landlord and Tenant Act 1954 (LTA 1954) and Agricultural Tenancies Act 1995 (ATA 1995). The latter only applies to agricultural businesses (farming).

Most non-residential leases are regulated by the former, even where the tenant is a private individual and does not operate a business from the property.

The effect of these laws is to reduce the power that a landlord has over the tenant by increasing the tenant's rights.

It is possible not to grant some rights if both the tenant and the landlord agree to "contract out" of the relevant sections of the Act at the time of signing the document.

Leases and licences

The difference between a lease and a licence is that a lease creates an interest in the property for the tenant, whereas a licence gives the licensee a mere right of occupation.

Whether an agreement creates a lease or a licence can be difficult to ascertain. Indicators of a lease can include:

  • exclusive possession of a defined area
  • the right to quiet enjoyment (restricting the access of the landlord)
  • the payment of rent (rather than a licence fee) for a (usually) long term
  • the rent being exclusive of other charges relating to the property (e.g. electricity)
  • the obligation to maintain the property, pay all outgoings, and so on.

We have a much longer article on this subject here.

Lengths of leases

Most leases have fixed terms between six months and 125 years. The length of the fixed term is usually negotiated by the landlord and the tenant before the lease is created. An agreement for a term over 30 years is generally referred to as a "ground lease" and is used largely by governmental authorities and ducal trusts to dispose of a construction site and yet not actually sell it.

With respect to businesses, generally, a short term is more beneficial to the tenant and not the landlord.

Finding tenants costs money, both in the cost of search and legal fees, and in the lost opportunity cost of having a property vacant. Provided the tenant is of high quality, most landlords will want a long term.

An advantage of a longer term is that, generally, the longer a tenant occupies a property, the more likely he is to stay, even if the rent increases.

Property investors give greater valuations to properties let long term because the risk of the tenant leaving is perceived to be lower.

As a tenant, you may prefer a short term with flexibility to move elsewhere if your business circumstances change (for example, if you might outgrow the space quickly). However, a longer term provides time for goodwill to be built around the particular premises - more useful for retail premises than for an industrial unit.

However, you might need a longer term for an industrial use if you intend to install machinery or install fixed plant.

Or maybe you simply prefer not to have to worry about moving every couple of years.

Excluding security of tenure

The most important factor for the landlord is to be sure he can regain control of his premises when the lease ends. Security of tenure gives the tenant rights with respect to leaving the property, including the right to stay during the "holding over" period (between the date the fixed term finishes and until a new lease is entered into or the current one is ended), and the right to be offered a new lease on the same terms.

The LTA 1954 grants security of tenure to tenants automatically if the fixed term is greater than 6 months, or if the tenant has been in occupation for more than 12 months. The only way to exclude security of tenure is by both the landlord and the tenant agreeing to opt out of sections 24 to 28 of that Act when they draw up the agreement.

The procedure involves a certain amount of form filling, but solicitors and an application to court are no longer needed.

Even if you have provided for the opt out, you still need to serve notice on your tenant. The notice period (and the whole procedure) result in the proposition that it is not worth letting commercial property for less than six months.

Under the Regulatory Reform Order 2003, a landlord can only refuse to continue the tenancy if the tenant has done one of a few things. One example might be that the tenant failed to make regular payments.

You may be interested in reading our article on procedures for terminating or renewing business tenancies.

Registration of leases and prescribed lease clauses

All leases with terms greater than seven years must be registered at the Land Registry. It is the landlord's responsibility to do this.

The Land Registry requires Prescribed Lease Clauses (PLCs) to be attached to the front of the lease. The use of PLCs is intended to speed up the registration process. The PLCs are a summary of the details of the agreement. They contain all the information that the Land Registry needs in order complete the registration of the document.

We have an article about the process of registering that may be of interest.

Allowed uses

Within the lease, the landlord can specify what the tenant may and may not do on the property. These "allowed uses" may be as detailed or general as the parties require.

A common issue that arises with respect to allowed uses is that the landlord's solicitor fixes the uses too narrowly. Although he or she may believe that a change in use will necessitate the tenant coming back to the landlord and perhaps paying a fee or more rent for the privilege, he or she may be limiting the landlord's rent or limiting who may take over the lease on transfer.

Particularly on longer term leases, where use is more likely to change over time, keeping the allowed uses clause general can be much more valuable than narrowing the uses. At a rent review, the new rent will be calculated by reference to the rack rent (then current rent) payable in the open market. If the allowed uses are narrow, then the size of the theoretical open market is smaller because there are fewer tenants who can use a building with limited uses. The new rent is therefore likely to be lower.

Additionally, if the lease needs to be assigned (transferred), the landlord will be unable to choose from as large a pool of tenants. If the quality of the tenant (and his ability to pay the rent on time) is important, a wide range of uses will be beneficial.

Lastly, it should be the tenant's responsibility to check that his proposed use is lawful. Some uses may be allowed nationally, but local planning laws might forbid them in a certain location or type of building.

Key terms in a lease

We have an article on the key terms that gives further information on the clauses found in most leases.

You may also want to read our negotiating tips for landlords and tips for tenants.

Stamp duty on leases

You cannot use as evidence in court any document transferring an interest in property, unless it has been stamped. That includes a lease. The rate is calculated as a percentage of the average rent for the term. If there are review provisions, HMRC will generally accept a calculation based on the starting rent.

We explain about stamp duty land tax here.

Lease documents and templates

Net Lawman offers two collections of leases. What we call our standard ones cover every letting scenario we can think of, and are perfect for the "DIY" landlord.

We also offer another range labelled as "commercial" aimed at professional property developers, solicitors and surveyors. These leases include provisions such as landlord's warranties, forms required to exclude security of tenure, references to land registration and prescribed lease clauses, provisions for an authorised guarantee agreement (and a draft AGA document) and provisions for sub-letting by the tenant.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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