A typical commercial lease could be anything from 20-50 pages and contain many thousands of words. Every single sentence and word put in the lease is there for a specific reason and each has a specific legal technical meaning.
Even a straightforward lease is a complex and highly technical legal document. It defines the rights and obligations of both landlord and tenant and once it is signed is set in stone.
Leasing property can be a very costly exercise over the term of the lease. Not only is there the rent to pay but also business rates and outgoings, the cost of repairs and maintenance and expenses that the landlord is entitled to recover under the lease.
As an example, a relatively modest 10-year lease at an annual rent of £10,000 could end up costing at least £150,000 over the lifetime of the lease. This compares to the value of a house. The sheer value and cost of a lease over its term means that it is very important that you know exactly what you are signing up to and that the lease is reasonable and appropriate for the property and your requirements.
Linked to that point is that if during the term of the lease you wanted to sell your business or assign the lease to someone else, if the lease isn’t right then any potential buyer will not want to take it on. You could therefore find that your business is worthless as there wouldn’t be anyone willing to take it on.
Anatomy of a Typical Lease
Every lease is different. The areas that a typical lease will cover (although in different ways) are as follows:
1. Parties to the lease. The landlord and the tenant must be property defined and set out in the lease. This may sound like an obvious point to make, but where there are limited companies, partnerships and joint owners involved this is not always as straight forward as it may seem.
2. Description of the property. Again, this seems like an obvious point but it is not always so straightforward in practice. Particular problems can occur when you are leasing a part of a property such as a shop unit which is part of a larger building or an office in an office block. The exact parameters of the property and what’s included must be precise in the lease. This is especially so when you take on an obligation to repair and maintain the property. If the precise definition of the property is uncertain then this is a matter where disputes can arise.
3. The lease term. This must be accurate and most leases have what is called “secure of tenure” which means that the lease can be renewed and some leases have a break clause, meaning that the lease can be brought to an end early upon notice.
4. Rent and rent review. There is normally a starting rent in the lease which is then reviewed at various agreed points in the future. Rent review provisions can be complex as there will be possibly several pages of factors that are taken into account to determine how market rent is assessed. Rent review clauses have to be right as these can be the source of disputes between tenants and landlords.
5. Tenant’s repairs. You have to be sure that you fully understand what your obligations are in terms of repairing the premises.
6. Landlord’s repairs. In some leases landlords are obliged to undertake repairs of certain items but in other leases they only have discretion to do so. Quite often, although the landlord does repairs, these can be passed to you as the tenant and so it is important for you to understand if and when the costs of potentially very expensive repairs can be passed to you.
7. Assignment and sub-letting. As a business owner, you will want to have the right to be able to pass on the lease to someone else if, for example, you close down or wanted to sell your business. The right to assign the lease is rarely unconditional and the landlord can demand fees from you and in some cases you might be required to act as a personal guarantee to a new tenant.
8. Permitted use and alterations to the property. The lease normally restricts what you can use the property for and whether you have the right to make alterations to it (either structural or non-structural alterations).
9. Insurance. Typically there are clauses that deal with insurance that you are required to carry out and what insurance the landlord must maintain.
10. Service charge. This is where a landlord provides certain services which you, the tenant, has to pay for. This could include repairs but also things like maintaining the grounds, surfacing car parks, lighting and cleaning of shared areas. Sometimes, the landlord can also pass on the costs of employing managing agents.
11. Landlord’s costs. There are often a list of occasions when the landlord can charge you for costs and expenses such as for enforcing the lease if there is any breach; instructing surveyors to inspect the property; when you are required to have written consent for the landlord for various matters and even for the landlord’s solicitor’s costs for preparing the lease itself.
Examples of common problems with leases:
Dispute over rent review
A typical lease might say that the rent should be reviewed in line with “market rent” every 3, 4 or 5 years. The problem arises when defining what exactly is a market rent valuation of your premises. You might, for example, have taken on the premises in a run-down state and invested a lot of money in bringing them up to standard. You would therefore dispute that the increase in value to the premises that you have paid for through your investment should be taken into account when deciding what a fair market value of the rent is at the time of the rent review.
You would also be aggrieved if the very fact that you are already in the premises and operating a successful business there should be taken into account when deciding what the market rent is.
It is important that the lease is written in such a way that all these issues are clearly defined and fairly balanced between the parties to avoid such disputes.
Repairs to the propertyThis is a huge source of disputes between landlords and tenants. There is a stark division between the interests of the landlord and the tenant because the landlord will want the tenant to pay for as much of the repairs as possible, whereas the tenant will want the landlord to bear the costs.
Many unwary tenants are caught out by the clauses in the lease that define what repairs the tenants are responsible for. A tenant could sign up to a lease and find themselves responsible for repairs that needed doing years before they even took over the property. The ideal for a tenant would be that they would only be responsible for repairs that arose after they took on the lease but if the clauses in the lease don’t properly provide for that then the tenant will be liable for all repairs regardless of when the damage arose and whose fault it was.
Particular items of potential repair that give serious concern include things such as roofs. A new roof, particular of commercial property, can cost tens of thousands of pounds. On first glance, a roof might look to be in a reasonable state of repair. However, it might not in fact be in such a state of repair as it might appear and also you have to remember that if you are taking say a 10-year lease, then you will be liable for repairs over the course of that 10 years. So for that reason you need to be aware whether any repairs are likely in the future during the term of the lease.
Even if you are only leasing ground floor premises in a building, you could still find yourself liable for the cost of repairs to the roof, depending on what is in your lease.
Service charge disputesService charges clauses often look innocuous and at the time that you sign the lease, the landlord might not be claiming much by way of service charge. However, often a lease gives a landlord a discretion to vastly increase the costs claimed from you under a service charge. Service charge clauses also often allow for the landlord to employ a managing agent and you could therefore find yourself having professional fees to pay as well. You should also bear in mind that if there was a change of landlord, in the event that your landlord sold the property, then your new landlord could take a completely different view of the services they provide and expand the cost to you.
Service charges are therefore a very common source of costly dispute between a landlord and tenant and something which needs to be looked at very carefully by your solicitor before you sign up to a lease.
You will presumably want your business to be valuable and have the possibility one day of selling it to someone else. The right under your lease to assign the property to a third party who might be buying your business is therefore very important. The assignment clause is a source of many disputes between landlords and tenants. First of all, if there is no assignment clause then you don’t have the right to transfer the lease to any third party. Secondly, if an assignment clause is written too much in favour of the landlord then the landlord can effectively control whether or not you are able to transfer the lease to somebody else. You can also find yourself being forced to stand as guarantor to the third party who you want to assign your business to and in that respect you would still be potentially financially liable for the rent.
Therefore, assignment clauses are something that you need to be aware of and fully understand.
What your solicitor does
When you are in the process of taking on a lease the role of your solicitor is as follows:
1. Analyse and advise you on the draft lease. The draft lease is normally prepared by the landlord’s solicitor and your solicitor’s job is then to very carefully study the lease, identify the implications for you and your business plans and make sure that you are thoroughly advised accordingly.
2. Draft and negotiate any changes. Where there are parts of the lease that aren’t totally suitable for your purposes, your solicitor’s job is to negotiate with the landlord’s solicitor and make changes to the lease where appropriate.
3. Getting information for you to make an informed choice. Your solicitor will make a number of enquiries with the landlord’s solicitors to obtain numerous relevant information about the property. One way this is done is through making what are called standard enquiries which involve over 150 questions being asked under 32 sections. The solicitor will also ask about such things as insurance and service charge costs, if appropriate.
4. Making formal searches. These are searches similar to what house buyers will be used to but which are specific to commercial premises. Commercial searches will not always be strictly necessary and it will be for you to decide which searches you want your solicitor to make. You can see more information about searches in our separate client guide on this topic.
5. Completing the lease formalities. This involves getting the lease signed and then co-ordinating with the landlord’s solicitor to agree the precise time and date on which the lease will legally come into effect. There will then be a physical exchange of leases (which are normally done these days by telephone and post) so that you will end up with physical possession of the lease actually assigned by the landlord.
6. Stamp duty land tax return. Depending on the amount of rent and length of the term, there might be stamp duty land tax to pay. Your solicitor will calculate and advise you on what this is. Whether or not there is any tax to pay, a stamp duty land tax return must be completed and sent to HMRC who then issue a certificate. Your solicitor will attend to this process. The stamp duty land tax return certificate must be obtained before registration can be completed.
7. Registration with the Land Registry. If your lease is for a term of 7 years or more then the lease must be registered with the Land Registry. Your solicitor will fill out the forms and sort out the formalities of this. There will also be a fee to pay for to the Land Registry, the level of fee depending on how much the rent is and what the term is. If a lease is with a term of less than 7 years there is a way that the lease can be registered voluntarily, though most tenants decide not to do so. Once the application for registration has been sent to the Land Registry, it is not uncommon for the Land Registry to raise enquiries which your solicitor will deal with. Once the Land Registry is satisfied, they will formally register the lease and issue a document to confirm that.
8. Tying up matters at the end. Once all of the above steps have been completed, your solicitor will write to you, confirm that everything is completed. You will be provided with the original lease and documents from the Land Registry confirming that you are the registered owner of that leasehold property. At this stage the matter is complete.