Commercial Property: The Common Traps With Business Leases
Tilly Bailey & Irvine’s Commercial Property team looks at the common errors and traps that business owners should avoid when entering into a lease for a commercial premises.
The location and passing trade may be vital for your business to thrive or the space and facilities within your warehouse may allow you to win tenders over your competitors; however, with many businesses on our high streets failing, it is key for any business to ensure that the following points are addressed prior to entering into a lease.
The key issues in respect of any commercial lease are:
1. Length of the term of the lease
2. The ability to break the lease on certain given dates
3. Assignment and subletting of the lease
4. What the property can be used for
Length of the lease
Within any business model, the length of your occupation within a property is fundamental when determining your short term or long term plans. When entering into a lease, the key issue for any business is that the term of the lease is neither too long nor too short.
Under the Landlord and Tenant Act 1954 (the “Act”), the standard position is that the tenant has the right to renew their lease at the end of the term unless the landlord can establish one of the statutory grounds to oppose a renewal. This gives tenants certainty that they can invest in the business and can remain in occupation if the business is successful. It is common for landlords to ask tenants to give up this right which is known as “excluding the lease” or “contracting it out” and can only be accomplished by following a set procedure. By excluding the specific terms within the Act, this does not mean that the landlord will not renew your lease but it removes the tenant’s right to ask the Court to order the grant of a new lease or specify its terms and instead any renewal has to be through negotiations with the landlord.
Planning ahead for any business is vital, so protecting yourself should you need to vacate your property before the end of the lease is essential. One way of ensuring that you can vacate prior to end of the term is to include a break clause. A break clause can be a right to end the lease on a fixed date or fixed dates or can be negotiated so that you can bring the lease to an end at any time.
Not all leases include a break clause but as a tenant it may be beneficial to negotiate the right to break the lease. When entering into a lease that contains a break clause, it is important that the pre-conditions are negotiated carefully as tenants have been caught out by serving the requisite notice to exercise the break but failing to comply with the other conditions.
Another concern is that if you require a break clause a landlord may also ask for one. This means that they can serve notice on you to end the lease on the agreed date.
Assignment and subletting of the lease
The right to assign (i.e. transfer) or sublet the property to another tenant provides flexibility to allow you to vacate the property at any time prior to the end of the term. However, many landlords place restrictions on this so that assignment is either subject to the current tenant being a guarantor for the incoming tenant and/or the incoming tenant has to meet certain requirements before the landlord will consent to the assignment. The restrictions on your right to assign or sublet should be looked at carefully before the lease is entered into.
Many issues stem from the restrictions regarding what you can use the property for. The key concern initially is that you have a right to use the property for your required use but at this point it is worth looking ahead to consider whether the permitted use is broad enough so that should you want to diversify in the future or should you wish to assign the lease that the permitted use is not too restrictive.
Please note, it is your responsibility as the tenant to ensure that you have the correct planning permission and any licences, which are necessary to use the property in the way you would like to.
It is in the landlord’s favour for the tenant to have a full repair covenant included within the lease. This will mean that as the tenant you will have to repair the property and return it to the landlord in good condition regardless of the condition of the property when the lease was granted.
A tenant should try to negotiate an amendment to the repairing covenant in the lease so that the tenant only needs to keep and return the property in “no worse condition” than it is in at the start of the lease which should be evidenced by a schedule of condition showing the condition of the property.