Points to watch when taking a lease of a business premises
Most tenants will recognize the importance of lease terms relating to the amount of rent payable or the length of a lease, but the remaining provisions can be just as, if not more, important with potential ramifications on their business costs. Below are several clauses commonly found in leases that a tenant should pay particular attention to when agreeing letting terms with a landlord or looking to take over an existing lease. The list certainly isn’t exhaustive and indeed a tenant may be more concerned to have sufficient parking spaces or the right to put up signage, but they are a starting point that any proposed tenant should be aware of.
Most leases, other than those for a shot term, have rent review provisions. The review can be based on calculating the open market rental value of the property by comparing it to similar properties, or calculated by reference to any increase in the Retail Price Index. If the review is based on open market value the lease will contain a host of assumptions and disregards to reach a final value. The lease should provide that any dispute relating to the rent review be referred to an independent surveyor.
The lease will provide what a tenant can use the property for. This will need to cover not only the tenant’s immediate requirements but also any anticipated future use. For instance a bookshop may in the future want to incorporate a reading area and open a small cafe to sell coffee and cakes. Unless the lease already permits such use the landlord will need to provide its consent, which it may refuse or charge a premium for. Be careful however as a completely open user clause permitting any use may attract a higher rent at review.
This is the clause that sets out if a tenant can transfer (assign) or sublet the lease to a third party. If a tenant’s business is going well and they are looking to expand they may need to move out of the property before the end of the term and lease a larger facility. Leases generally contain a restriction against such action without the landlord’s consent, although most will permit an assignment or subletting subject to conditions. Most leases provide that, on assignment, the outgoing tenant gives a guarantee that the ingoing tenant will pay the rent and perform the other lease obligations.
A repair clause will set out what condition a property needs to be kept in during the term, and what works may be needed at the end of the term when the property is returned to the landlord. Usual wording is likely to be to “put and keep the property in good and substantial repair” or such similar phrasing.This can involve spending money at the end of the term on putting the property into a better condition that when the lease commenced. If in any doubt a tenant should agree with the landlord that a schedule of condition, a document prepared in advance of the letting which portrays the condition of the property, be annexed to and referred to in the lease which will limit the tenant’s repair obligation both throughout and after the term.
Any lease that isn’t of the whole of a building, such as a floor of an office block, is likely to contain a service charge provision. Service charges can be very high so particular attention should be paid not only to what the services are, which will be set out in the lease, but also to the current service charge budget and preferably what the last three years’charges were so that an estimate can be made of the likely charges going forward. If in any doubt a tenant should ask for a service charge cap, so they will know the service charge cannot be over a particular amount regardless of the services that the landlord provides.
The above are only five provisions in a document that may contain up to and in some cases in excess of thirty. There may be a break clause or a requirement to provide a rent deposit, or the landlord may wish to exclude any security of tenure. These all have implications both legal and practical, and as such any tenant looking to take a lease should seek legal advice from their solicitor.
For further information on leasing business premises, please contact Rachael Spalton, partner in our Commercial Property team.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.