A BRIEF TENANT GUIDE TO TAKING A LEASE
A business lease is a legally binding contract between the legal owner (Landlord) and the occupier (Tenant).
When you are negotiating to take a Commercial Lease, you are expected to be able to make commercial business decisions, so you need to know more than just the first normal question of "How Much."
The 2007 Code for Leasing Business Premises ('the Lease Code') provides a useful framework within which a prospective tenant can reasonably expect a landlord to operate.
As a prospective tenant, you should not assume that a landlord (or their Agent or their Solicitor) complies with the Lease Code.
At David Walker Commercial you should expect terms and occupation costs to be explained and made clear. But remember that we are not mind readers. Solicitors may also hold a different opinion, and advise the Landlord differently, as the lease contract is not fixed and binding until it is finally signed.
To save cost and delays, a number of our Clients use a Standard Pre Printed Law Society Lease, which is intended to comply with this Lease Code. As it clearly states, signing a lease creates legal obligations. So know what you are signing and seek advice before you do.
A link to the full lease code is at the end, but the main extracts follow.
You should expect the Landlord to make very clear exactly what you are being asked to agree. You should be able to understand the total extent and duration of the cost and liability you will be taking on if you sign a lease based on the terms being offered by the Landlord.
You should know from the offer exactly what the property is. You should also remember that, however good your relationship is or seems to be with the Landlord, the Landlord may sell to another party; the terms you agree and the lease you take on must reflect everything you rely on to conduct and safeguard your business.
You should request alternative terms if you are not happy with the initial terms of the Landlord's offer, always bearing in mind that any variation (such as lease length, rent review terms - including frequency and basis - break options, etc) may change the level of rent or other terms.
Financial matters, rent deposits and guarantees
The Landlord should provide full details of your expected costs involved in leasing the property. This should include all personal or company guarantees, security deposits or other bank guarantees. Not all costs will be fixed at the time of agreeing the lease. You should expect the Landlord to explain how any costs are calculated so that you can understand the risks and make sure you can afford all of the costs of leasing the property. If the Landlord demands a deposit, you should make sure you understand the conditions under which it is held and the basis on which it will be returned to you. You should remember that this is YOUR money that the Landlord is holding as a protection against any failure on your part. If you are asked to give a personal guarantee, you should avoid using your home as security. You should be able to understand both when and how the Landlord may call on your guarantee, and also what the guarantee would actually cover.
Your lease may contain provisions allowing the Landlord to change the rent. The rules by which the rent can be changed should be clear and understandable. It should be arranged that the Landlord cannot simply impose a rental increase. The basis of rent review should be to the market rent unless clearly stated otherwise. If you agreed increases fixed to an index, the basis should be a published, independent, authoritative source.
If there is an open market rental value provision, it should specifically exclude (or disregard) any improvements you make, other than as part of an explicit obligation, or any value arising from your business. You should also make sure there are controls in the event of disagreement that will be referred to an independent expert or arbitrator to settle. Your lease should include a provision allowing you to serve a rent review notice on the Landlord. If the Landlord does not initiate the rent review, think very carefully before deciding not to serve notice on the Landlord as you may be responsible for paying interest on any increase in rent above the original rent from the appropriate rent review date until the review has been agreed.
Subletting and assignment
Subletting (creating a new lease of all or part of the property) If your lease allows subletting, you should understand any limitations (in terms of the amount of space, the use and the rent you can charge and the nature of the subtenant you can sublet to).
It is usual for Landlords to insist that subleases are granted outside the protection of the Landlord and Tenant Act 1954 and on similar terms to your lease.
Be careful that restrictive subletting provisions do not prevent you from, say, sharing your space with a supplier or service provider (for example, an outside cleaning company which you provide with its own cleaner's cupboard) Landlord's written consent is likely to be required for subleases.
Assignment (disposing of your existing legal interest in the whole premises)
It is common for Landlords to require you to guarantee the lease once you have assigned it to a third party. The form of guarantee (an Authorised Guarantee Agreement or AGA) usually makes you responsible, as a guarantor, for the lease obligations until your assignee (the person to whom you sold your lease) assigns the
lease to another party. The Landlord should not impose any condition which requires you to be in compliance with the lease at the time of assignment.
Lease length, break clauses and renewals
The Landlord should make clear the length of the lease, whether there are any rights to break the lease and whether you will be entitled to an extension of the lease on expiry (see section 11 below). Make sure that the length of the lease is appropriate for your business needs; ask the Landlord to offer you a break option exercisable only
by the tenant (this will be you unless you have assigned your lease) to give you the opportunity to cancel the lease at a time that suits your business.
A right to break should allow you to walk away from the lease at a given time after informing the Landlord in writing. This should be conditional only upon having paid the rent due under the lease and giving up occupation of the property, leaving behind no continuing subleases. You may have other liabilities to fulfil, but these should not
be used to invalidate the right to break.
When your lease ends, whether by expiry or by exercise of a break option, you will be liable to the Landlord for any sums due and for any repairs you should have carried out during the lease (dilapidations). Be sure that you understand what notices you would be required to serve on the Landlord to end the lease, and how and when these
should be served.
The Landlord and Tenant Act 1954 gives you the right to extend your tenancy when your lease runs out. Unless both you and the Landlord have agreed (in the correct
procedure) that the lease is to be excluded from the relevant sections of the Landlord and Tenant Act 1954, you will be entitled to renew your lease unless your Landlord can prove certain specific circumstances, which include redeveloping the property or occupying the space himself.
You should make sure you understand the options available to you when your lease expires. Take professional advice to make sure all notices are properly served and that your interests are protected.
You should expect the Landlord to be explicit in his offer about any service charges, including how these costs are calculated, what they cover (and don't include) and the extent to which you will be obliged to pay towards any capital improvements and long-term repairs or replacements of structure, fabric or machinery and equipment.
UNLESS you specifically agree at the time of taking the lease to carry out works or to reinstate the property to its original state, check that the lease does not require you to put the property into a better condition than when you take the lease. You should bear in mind if you buy an existing lease (take an assignment of someone else's lease), that the condition of the property when you take it may be poorer than it was at the beginning of the lease. You may be required to put the property back into its original condition so it is worth taking professional advice.
Alterations and changes of use
Your lease will limit the use of the property to a specified purpose (for example, B1 (Offices). The lease will usually put the responsibility on you to check that your proposed use complies with any planning consent. The lease may be quite restrictive in terms of any signage and any alterations you are permitted to make. Before you enter into the lease, you should make sure you are permitted to carry out any works your business needs.
The Landlord should be required to give his consent within a reasonable time period (say 21 days) and should not be able to refuse your proposed alterations without good reason. You should be aware of statutory requirements (such as Construction
(Design and Management) Regulations 2007 (CDM) that you must comply with when carrying out any works or alterations to the Property. The CDM regulations require you to keep full and detailed formal records and your Landlord will require you to maintain these records throughout the lease.
You may be required to reimburse the Landlord for his insurance premiums, and the Landlord should tell you what commission payments (if any) he receives. The lease should provide for the Landlord's policy to be used to repair or rebuild the property unless the insurance is invalidated by anything you do, in which case you may be liable for the reinstatement.
Tenant's defaults and applications for consent
The lease forms a legal contract between you and your Landlord. Any breach of contract may have serious consequences and you should take care to understand your obligations and steps the Landlord may take against you and, if applicable, your guarantors, including Court action.
The laws relating to Landlord and Tenant relationships are complex and you should seek professional advice so you are clear on your obligations and rights. A fair lease is one which allows you enough opportunity to fix any problems (without loss to the Landlord) before any legal action is taken.
You may find that you have failed or forgotten to carry out some obligations under your lease. It is usually best if you are able to carry out these obligations yourself. It may be better sometimes to approach the Landlord and negotiate a reasonable payment to have the Landlord carry out the obligations after your lease has expired.
The remedy for a breach of your agreement may range from the Landlord sending in bailiffs, who may seize goods to the value of the breach, to the Landlord taking back the property from you ('Forfeiture'). You should note that this would not take away your liability to pay arrears of rent.
The Landlord may try to forfeit your lease by locking you out of the Property or by obtaining a court order. In either case you can apply to the Court to give you time to put matters right or to pay what you owe. Seek urgent professional advice in that situation. New legislation often brings new obligations for owners and occupiers of property. Leases often require tenants to comply with statute at their own cost. You should ensure your obligations under the lease are proportionate to the length and terms of your lease and you should take professional advice and make your own estimate of any expected costs. You should research possible new Regulations
that could affect your occupation and your business. This provision should not be taken lightly and you should ensure that the Property is in compliance with existing regulations (for example, with Disability Discrimination Acts, Town and Country Planning Acts, Health & Safety Acts or Environmental Protection Acts) when you
take the lease.
Applications for consent
You will need to make applications to the Landlord during the lease, for example, if you intend to carry out alterations or if you propose to sublease or assign your lease.
The lease should specify that the Landlord may not unreasonably withhold or delay his consent. The Landlord's duty to respond only applies from when he has received from you adequate information about the proposed alterations or about the proposed assignee or subtenant and full details of the proposed transaction.
The Code for Leasing Business Premises in England and Wales 2007
Leasing Business Premises: Occupier Guide
Copyright The Joint Working Group on Commercial Leases, 2007.