6 Things You Need to Know Before Leasing a Property

COMMERCIAL LEASE OF THE WHOLE OF PREMISES

This blog is intended to provide an overview of the lease of the whole of commercial premises and some of the important matters that parties to the lease should consider. It is not intended to provide a structure for lease drafting purposes but to highlight only a number of considerations within leases of the whole of an office. Leases of part of an office building are treated differently.

All leases should strive to be a fair balance between the parties and it is a fallacy to believe that standard form leases are suitable for all purposes and before adopting any standard form lease these should be scrutinised to ensure that they correctly reflect the intentions of the negotiating parties. This is not to say that in some circumstances standard form leases should not be used but they should be considered with a view as to whether or not they correctly reflect the intention of the parties. 

Lease term

It is important to consider when taking out a lease on premises what the lease term should be. This is significant since not all leases are required to be registered at HM Land Registry. Leases that are for a term of 7 years and above are required to be registered but many a practitioner, as a matter of good practice, but not necessarily law, will ensure that a lease term is 7 years less a day to ensure that these do not fall into the registration category.

Rack Rent

The parties should consider whether the rent will be a rack rent without a premium. A rack rent, for the purposes of this writing, is an open market rent value of the property generally determined on an annual basis. The premium on a rent is an additional amount that is payable and it is usual for long leases to attract a premium and a premium may be thought of as being analogous to the purchase price for the lease. It is necessary to consider whether the rent should be paid monthly or annually and while a fair balance in negotiating leases needs to be struck between the parties, a landlord will generally seek to have rent paid on a monthly basis whereas a tenant, and depending on the nature of the business, may for purposes of turnover require rent to be paid quarterly. In addition, the parties can consider whether a rent-free period will be granted to the tenant and this is usual where the tenant seeks to undertake improvements to the property and where these improvements are undertaken, it is also usual for the tenant and the landlord to agree the terms of a Licence for Works or a Licence to Alter.

Rent Reviews

Reviews of the annual rent should be carefully considered and these are generally upwards only and are on an open market rent review basis. Many leases include provisions for the rent to be increased according to a Retail Price Index and while this is quite common, the Office for National Statistics states that reviews determined by the RPI may lead to inaccurate results since they are not a good indicator of inflation and this may be worthwhile considering, more particularly with regard being had to the phase that the world is entering with higher inflation. 

Repairing Obligations

Repairing obligations in a lease need to be well thought through. Generally, leases of the whole of a building are full repairing leases (FRI) and these would require the tenant to take responsibility for the interior of the premises and the exterior. Care however should be taken to consider whether or not the tenant would want to take responsibility for the roof structure and roof and for the load bearing elements. As such, it is permissible to negotiate the exclusion of these elements from a lease on the basis that these elements are generally covered by the landlord’s insurance policy. In addition, the parties may wish to qualify the tenants’ repairing obligations by reference to a Schedule of Condition. A Schedule of Condition will generally contain a report and photographic representation of the state and condition of the premises at the commencement of the term of the lease and as such, at the end of the lease term, the tenant will not be obliged to restore the property to the landlord in any better condition than that evidenced by the Schedule of Condition.

Right to assign

Leases will generally contain provisions as to assignment of the whole of the property and exclude a right to assign part only and can permit sharing the occupation of the property with a company that has the same or similar objectives as the tenant company.

Grant of new lease

Finally, while leases are for a defined term, the tenant may always require the landlord to grant a new lease at the end of the term and unless the landlord requires the property for their own purposes or for development (these are not the full extent of the grounds afforded a landlord to require the return of the property) the tenant can expect the landlord to grant a new lease. For this reason, a provision will be incorporated in the lease excluding security of tenure under Section 24-28 of the Landlord and Tenant Act 1954 which disentitles the tenant an entitlement to a new lease. This is not to say that a landlord would not grant a tenant a new lease upon request at the end of the lease term but this is then up to the landlord to decide.

There are a good number of other provisions that the parties should consider in negotiating the terms of the lease and a foregoing, does not seek to limit the matters for negotiation between the parties entering a lease.

The contents of this article do not constitute legal advice and are provided for general information purposes only.