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It's a big financial commitment taking on a business lease.
Make sure it meets your needs and you understand all its
implications before signing on the dotted line……
The guide 'A code of practice for commercial leases in
England and Wales' can help landlords and tenants to negotiate
fairer leases. But leases are complex and few people outside the
property and legal worlds will understand all the details. So
call in the professionals - your chartered surveyor and
solicitor. The combination of the two viewpoints makes all the
difference.
Business leases
questions and answers:
What is a lease?
A lease is a binding legal contract that sets out the terms and conditions
of the tenancy agreement between landlord and tenant. It defines the rights
and duties of both people. It is enforceable - you cannot simply walk away
from a lease. The law also defines certain aspects of the relationship
between landlords and tenants.
New or existing lease?
It is not always a simple matter of a tenant taking a lease direct from the
property owner (the freeholder). Take the following situation:
-
An investor owns the freehold of the building
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A tenant takes a lease from the freeholder
-
A second tenant later takes on this lease from the original tenant,
becoming the assignee and assuming the responsibilities of the original
lease
-
The assignee later grants a sub-lease over surplus parts of the
building to a sub-tenant.
In practice the chain may be far more complex than this. Needless to say,
nobody down the chain can grant a lease longer than their own.
As a prospective tenant, you might be negotiating a new lease with the
freeholder. On the other hand you might be entering the chain lower down and
taking an assignment of an existing lease, or perhaps a sub-lease. With the
new lease you can negotiate the terms to match your needs (though you will
not necessarily get everything you want!). With an existing lease you will
be bound by existing conditions and you have decide before signing whether
you can live with these or not.
Is there such a thing as a standard lease?
No. It is up to the landlord and tenant to agree the terms. However, there
are certain legal matters that will crop up in almost all leases and the Law
Society produces templates leases for various types of tenancy.
The landlord and their advisers will probably have a clear idea of the
form of lease they would like and the main conditions. You, as prospective
tenant, may want to negotiate for changes on specific points. Your
bargaining position will depend on several things, including the state of
the property market at the time. This is where your chartered surveyor's
expertise will be invaluable.
How long should a lease be?
Again, this is up to you to negotiate. Longer leases often have terms
allowing for the rent to be adjusted at intervals of, say, three to five
years. The wording of this rent review clause is very important - get it
even slightly wrong and it could cost thousands.
However, the length of the lease does not necessarily limit how long you
stay in the property. Most business tenants have security of tenure under
the Landlord and Tenant Act 1954, which gives them the right to have a new
lease when the existing lease ends, subject to certain exceptions. Make sure
you understand your rights.
Do I always have security of tenure?
Not all leases include this security. You must be
extremely careful giving up your security of tenure. And even if your
tenancy is protected under the Act, you are not guaranteed a new lease when
the current one ends. The landlord might oppose it for some legitimate
reason, for example, because they want to move in themselves or redevelop
the building. Or they claim you had consistently breached the terms of the
old lease. For more information on security of tenure and lease renewals
contact your Chartered Surveyor or solicitor.
May I make changes to the building?
You probably won't be allowed to make any structural changes or building
extensions but may be able to make internal ones - such as partitioning -
with the landlord's consent. But you may have to remove any changes you have
made internally and return the property to their original state at the end
of the lease.
What about redecoration or repairs?
It's usually your responsibility to look after inside decoration and repairs
and possibly the outside ones too. So if you are planning to lease a
building that is already in disrepair get your Chartered Surveyor to survey
the property first. They will let you know how much needs doing. Plus,
towards the end of the lease the landlord may serve a 'schedule of
dilapidations' notice on you to carry out any repairs listed in the lease.
Since there is often argument over this point, professional advice is essential
and if possible a schedule of condition should be drawn and agreed, prior to
the lease.
Who insures the property?
Normally, you pay the premiums in one form or another, even if your landlord
arranges the insurance, which often covers loss of rent. Most tenants will also want to insure against
disruption and loss of profits should the building become unusable following
a fire or other accident.
Am I restricted in my use of the building?
You will inevitably be subject to some limits under planning permission
rules. You will not be able to use a high street shop as an engineering
works! The lease may also impose further limits - to keep a balance of
tenants in a shopping centre, for example. A lease with strict use
conditions may be difficult to assign.
How is the rent set at the start?
The landlord, you and your advisers agree the rent before the lease is
signed. However, you can review this at intervals. The expertise and market
knowledge of your chartered surveyor is vital here, as they can advise you
on what figure is reasonable. And sometimes it may be possible to negotiate
some form of rent-free period at the beginning of a lease.
But you cannot review the rent by itself without considering the other
terms of lease. You should, for example, expect to pay more if the landlord
takes responsibility for repairs than you would do if you were responsible
for them.
Will the landlord need a guarantee for the rent?
If your business is a very young or small one, the landlord may ask for some
kind of guarantee for the rent and the other terms of the lease. If your
landlord asks you for a personal guarantee, be careful. If your company goes
bust, the landlord could have a claim on your home and other personal
belongings. You also need to make sure any guarantees would end if the lease
was then assigned.
What happens at the rent review?
Most leases include a clause of rent reviews in the future. This is usually
every three to five years during the length of the lease, possibly in an
'upward only' direction. For a guide to rent reviews see the
publication 'A code of practice for commercial leases in England and Wales'.
However, following cross-industry agreement, landlords have been recommended
to offer tenants alternatives to upward only reviews. Your chartered
surveyor can advise you on the implications of the landlord's proposed rent
reviews and whether there may be scope for negotiation.
How are landlord and tenant disputes resolved?
Ideally, by discussion and negotiation. But you can't always avoid serious
differences, particularly on issues like market rent levels at the review
point. So leases normally say in advance what happens when disagreements
occur on certain key points.
Without other terms, the ultimate recourse is to the court - both time
and money consuming. But the lease may also say that disputes can be
referred to an arbitrator or to an independent expert. (link to DRS)
What are service charges?
If your business is in part of a larger building, the landlord may charge
you part of the cost for the services they supply to the whole building:
maintenance of common parts, decoration and maintenance for the outside of
the building and the like. This is the 'service charge'. You need to
understand how these charges are calculated and how much they are before
signing the lease.
Who pays business rates?
You as the tenant pay the business rates. Occasionally, however, the
landlord will pay and pass on the cost to the tenant, perhaps in the service
charge. The lease should make clear where the responsibility lies.
Can I escape from a lease if my property needs change?
Yes you can either 'assign' the lease to another tenant who takes over
responsibility for paying rent to the landlord. Or 'sub-let' to another
tenant, from whom you in turn collect rent. However, your lease will
probably limit or impose conditions on either of these. You need to
understand these limits fully before you sign the lease.
Some leases include a 'break clause', which gives the landlord or you (or
both) the right to walk away from the lease at a specific point. For
example, you might sign a 15 year lease but with the option to break the
lease after 10 years. There might or might not be a penalty for this - again
check the details of the lease.
Assignment and sub-letting terms can effect your future flexibility. Make
sure your chartered surveyor or solicitor explains exactly what you are
being asked to agree to, and its possible implications (see the section
sales, assignments and sub-letting).
Am I still responsible after escaping from a lease?
Before 1996, if you signed a lease you stayed ultimately responsible for
paying the rent and following the other terms until it ended, even if you
passed the lease to somebody else, who in turn might pass it on. This was
known as 'privity of contract'. It meant the landlord could come back to
you, perhaps many years later, to pay the rent and fulfil the other terms of
the lease if one of the next tenants down the line went bust.
After 1 January 1996
this 'privity of contract' as it applied to the tenant,
ended. However, most landlords will ask you, as tenant, to sign an
'authorised guarantee agreement'. This means you remain responsible for the
lease if the person you passed it to defaults. But you are not responsible
if following tenants default. But remember, if you take on a lease that was
originally begun before 1996, the 'privity of contract' still applies.
Occupation under
license
Young and start-up businesses need every spare penny to plough into the
business plan. So rather than take out a lease on a property why not
consider occupying your premises under a licence? Property owners sometimes find it convenient to grant a licence, partly
because the occupier will not qualify for 'security of tenure'. Licences are
usually much shorter and do not need the same level of financial commitment,
thus offering more flexibility.
But licences need to be drawn up very carefully. Otherwise the law
might read them as a lease. So it is vital to take advice from a solicitor
and a chartered surveyor before signing a licence, either as occupier or
licensor.
What is a licence?
In this context a licence is technically a 'licence to occupy'. The
'licensee' - the business that occupies space under a licence - does not
have a tenancy so cannot be described as a tenant. Nor do they pay rent.
Technically, the payment it makes for the use of the space is a 'licence
fee'. A licence needs to be written carefully so it does not become a lease
and therefore come under the Landlord and Tenant Act 1954.
What are typical terms for a licence?
These vary greatly with your circumstances. The licence fee (the equivalent
of rent) might be payable monthly in advance or even weekly. The 'licensor'
(the equivalent of the landlord) may want the occupier to leave after one
month's notice. The occupier may also be able to give one month's quitting
notice. Various services may be provided as part of the licence arrangement.
What are the advantages?
If you are without much financial backing you may find it easier to get a
licence than a lease. Usually, you need to pay a deposit equivalent to one
month's licence fee, plus one month's licence fee in advance. If you take a
licence you will also find it much simpler and cheaper to get out if your
business plans do not work out and you need to leave.
What are the drawbacks?
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As occupier you have no 'security of tenure'
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You might lose your premises at quite short notice. So it can be risky
to invest in decorating or furnishing the space to fit your needs
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You are at the mercy of the licensor. Especially if they decide you
must sign a full lease to continue using the space
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You may also find the licensor has access to the premises you occupy
at any time
Because a licence appears simpler than a lease there may be a temptation
to ignore the usual precautions. Do not grant or accept a licence without
consulting your solicitor and chartered surveyor.
What sorts of properties are available under
licence?
It varies a great deal. Old multi-storey warehouse buildings are sometimes
refurbished as small office units or even as individual rooms that might be
available under a licence. Older industrial buildings - 'sheds' - are
sometimes occupied under licence, as are seasonal shops. Regional
development agencies may make 'starter' office units available under licence
and perhaps provide communal photocopiers, secretarial assistance and the
like.
Some businesses, which own or lease the buildings they occupy, find
themselves with surplus space and often make sections of the building or
individual rooms available under licence.
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