Juliet Farrington-Breeze, a Trainee Solicitor in our commercial property department, answers common questions about renting commercial premises.
Q: Where do I begin?
A: Depending on the nature of the premises and the parties involved, the main terms of the lease can be agreed directly between the landlord and tenant or through an agent who will draw up a document known as ‘Heads of Terms’ which details the agreement. The agent will send these Heads of Terms to the parties’ legal representatives, who will begin the process of drafting the lease.
Q: Should I seek advice before approving Heads of Terms?
A: Heads of Terms set out the main agreements that have been made between the landlord and the tenant. Although Heads of Terms are not legally binding, they can be difficult to alter once they have been agreed. If you are being asked to agree on the Heads of Terms and you are unsure about any element, do not hesitate to contact us; we would be delighted to assist you at this early stage to ensure that the transaction gets off to a smooth start.
Q: What are the main terms that need to be agreed?
The length of the lease depends on what can be negotiated between the landlord and the tenant. Tenants should consider how long they are likely to want to stay on the premises, taking into account their business needs. Tenants should consider giving themselves flexibility by negotiating a break clause and having the benefit of alienation provisions (referred to below).
A break clause sets out the circumstances in which the tenant and/or the landlord can terminate the lease early. The break commonly occurs on a particular date and can be subject to certain conditions, such as providing notice and the rent being paid up to date. The inclusion of a break clause gives the parties assurance that should they need to terminate the lease early, they have the ability to do so.
If the lease is for a mid to long term, it is usual for a rent review to occur. This, as the name suggests, means that the rent will be reviewed and adjusted. It is usual that this will be an 'upward only' rent review, meaning that the rent will not decrease. The rent may be reviewed against the open market rent, in line with the Retail Price Index, or it may be subjected to a stepped review at stages throughout the lease.
Alienation refers to the tenant's ability to assign (transfer) the lease to someone else or to sublet the premises.
Security of Tenure
Leases for business purposes attract 'Security of Tenure' under the Landlord and Tenant Act 1954 (“the Act”). It is essential that both the landlord and the tenant understand the impact of this and are aware of the consequences of the lease being included within the Act or 'contracted out'.
If the lease in contracted out of the Act, the tenant will have no automatic right to a new lease at the end of the term. The default position is that they would need to vacate the premises and/or start the negotiation process again with the landlord.
If the Act is included within the lease, the tenant has an automatic right to a new lease at the end of the term. In order to exercise this right, the tenant will need to serve notice on the landlord, subject to strict time constraints. This can be defeated by the landlord under certain circumstances, for example, if the landlord would like the premises back for their own use.
Leases usually contain a limitation on what type of activity the tenant may use the premises for, such as retail use or as a warehouse.
It may be that the tenant will need to apply for planning permission in order to use the premises for their desired activity. It is best to discover this at the outset so that there are no unnecessary delays during the transaction.
Q: I need some advice - what should I do?
A: Get in touch! We’d be really happy to have an initial, obligation-free phone call to talk you through any concerns that you may have and to give you an overview of the process. Our commercial property team is very friendly and we like to explain things in plain English – we promise no legal jargon!