Business leases: key terms
Why the terms of the lease matter
Most business agreements serve two main purposes: first to record the terms agreed and secondly to provide protection to each party against a breach of the terms by the other. They are often put to the back of a drawer after signing and may never see the light of day again.
A business property lease does not fall into that category. Both landlords and tenants will consult the document regularly to remind themselves of their rights and obligations, particularly with respect to use, maintenance and repair. It is therefore very important that each side is certain that every detail is appropriate and fair.
Who sets out the terms?
A landlord's solicitor will often present a tenant's solicitor with a draft lease of enormous complexity, accompanied by a terse 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?
Of course, a cynic might say that the tenant's solicitor will make more money in advising on a complicated lease than on a simple one, so the system gravitates towards unnecessary complication.
Most prospective tenants are not prepared to withdraw from a transaction that 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.
An 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.
A Net Lawman property lease could be a useful template for agreement before a solicitor is involved. If a solicitor is needed after, then the template will drastically reduce the time the solicitor spends working on the agreement and will reduce the cost for whoever pays.
Heads of terms or draft lease?
The landlord's solicitor will produce a draft 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 before a draft lease is drawn up.
Power depends on the economic cycle
At different times in the economic cycle 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, which help him create an "institutional quality" lease, the tenant should realise that he has some bargaining power.
Important terms that you should consider
Landlord's solicitor's costs
More often than not, commercial property landlords are professionals. In contrast, even tenants that have large tenancy requirements tend not to be. As a result, landlords generally have more property knowledge and experience, and they are more likely to dictate terms with very little margin for the tenant 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 (or 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 the deal from himself to the landlord.
Psychologically, a landlord is 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. To him, it is just a question of "some you win, some you lose".
Fix your own legal bill
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.
Extent of the property
Both sides should agree the plan of the property and where the boundaries lie. Landlords will avoid future problems and arguments if they go to the small expense of obtaining a proper conveyancing plan that clearly and precisely identifies the areas that will be let. The plan should also show matters referred to in the body of the lease, such as areas designated for parking, access, refuse storage, and the location of underground or overhead cables, pipes, drains and so on.
The lease term - how many years?
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. Remember that terms of more than 7 years require the landlord to register the lease at the Land Registry.
Early termination - break clause
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 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 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. The overall floor space can be split between that which the tenant can use, and space that he cannot use (perhaps because of structural obstacles in the way). The tenant should bear in mind the amount of usable space, and not the total amount of space.
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.
When a rent review comes up, the landlord will claim rent based on the open market value for the "use allowed". The question of use is of course more important in longer leases where the use is much more likely to change over time. It is a mistake for the landlord to fix the uses allowed narrowly - perhaps with the thought that if the landlord needs to change the use in any way he will have to come back to the landlord, and perhaps pay a fee or higher rent for the new use.
The point he misses is 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, that market rent will be highest when the property can be used for many uses and lowest, when the use is restricted to a single, low value use. A landlord should therefore think particularly carefully before imposing a use restriction which limits a change to a use which in fact could provide a higher rental value.
Signs and advertisements
Advertising on the exterior of the building can be valuable to the tenant and the landlord. The tenant will probably want to advertise that his business is located at the premises. The landlord may be able to persuade third parties to rent exterior wall or roof space for displaying advertisements (potentially conflicting with the business of the tenant).
Traditionally drawn leases fail to cover the many possibilities for visual impact. We take the view that a landlord is entitled to know about, and approve what his tenant wishes to show. It could be only a sign on the inside of a window, but it could also be an electronic flashing attention seeker across the roof or on a pole in the car park.
If a sign affects the use or enjoyment of adjacent or neighbouring premises of the Landlord, he may be liable to that other tenant for failing to provide "quiet enjoyment".
Both sides should be aware of who will have the rights to use exterior space for advertising and the consequences for themselves and the other party.
This is an area governed in part by the Landlord and Tenant (Covenants) Act 1995 and which can be a minefield for the parties.
Whether a guarantor is required is entirely a commercial decision. We suggest that in the case of a grant to a limited company, you should always obtain personal guarantees from all of the directors of the company. Do not be tempted to relax this policy because the directors are married or family members, and only one of them is involved in running it. Always take up references. If the landlord or guarantor is not a householder, then obtain proof of his financial substance. No proof - no business lease.
Net Lawman's leases have guarantee provisions that are stronger than most tenants would like. In particular, the guarantor remains in place after an assignment and even onwards through successive renewals of the lease. We suggest that either the landlord takes a tough stance and makes sure that the guarantor is aware of the long period over which his liability may materialise, or cut back the provision so that it applies only for the period during which the tenant is in occupation. It follows that the landlord should then require a comparably strong guarantor to the assignee.
Responsibility for repairs and property maintenance
If the cost of the lease justifies it, both sides are strongly recommended to rely on professional surveyors to negotiate repairs terms. If surveyors are not involved, then 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 may have little scope for negotiating on the question of repairs, particularly if he is the developer.
Where older buildings are concerned however, it is far 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 sub-let?
Sub letting is generally out. There are sound legal reasons why a landlord should not permit sub letting. If a proposed 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 of the lease
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.
Security of tenure
The Landlord and Tenant Act 1954 provide that a business tenant has an automatic right to a new lease at the expiry of the original term. However, there is provision in the Act for the landlord to contract out of this right. This may or may not be important to the landlord.
Contracting out (excluding security of tenure) enables the landlord to obtain possession at the expiry of the term without having to prove that one of the reasons given in the 1954 Act applies.
Make sure the prescribed notice has been given at least 14 days before the lease is signed. It must then have been acknowledged by the tenant before the lease is dated.
We have a more detailed article on how to exclude security of tenure.
Further information and documents
Net Lawman offers two sets of leases. What we call our standard agreements cover every letting scenario and are perfect for the "DIY" landlord.
We also offer another range of agreements aimed at developers, solicitors and surveyors. These lease include additional paragraphs and provisions such as extensive 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 provisions for sub-letting by the tenant.
You may be interested to read our tips for landlords next.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
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