Understanding the contents of a commercial lease

What is a commercial lease?

It is an agreement or contract between the Landlord and the Tenant for a lease of business premises. Lease is a grant of a right for a period for which the Landlord agrees to let or to grant exclusive possession of the property for the benefit of  the Tenant. This grant of a right is subject to rent payments and performance of the covenants in the lease. A legal lease which is for 3 years and over must be made by a deed. This agreement can be complex and contains many essential definitions which have to be checked before you as a Tenant   decide to proceed with a lease. Below are the main provisions and clauses which can be found in a commercial lease. A commercial lease is protected by the Landlord and Tenant Act 1954 unless this is specifically excluded. The tenant therefore has the right to renew the lease after the expiry of the term for which it was granted. If the parties agree to the exclusion of such a protection there should be a reduction in rent as a result of a loss of significant rights given to the Tenant by this protection.

Contents of a lease

Every lease will contain general provisions relating to the name of the parties, property, demise, rent amount, date, definitions section, interpretation provisions, tenant’s and landlord’s covenants, rights granted, rights reserved, attestation and any other provisions e.g. restriction on planning.

Service charge

This mostly applies to the lease of a part of a premises. The Landlord will be responsible for maintenance of the common parts of the building, used by all tenants, and will want to recover a cost of this in the form of a service charge payment.

Alterations

This clause specifies what alterations can be carried out on the property. If the works constitute improvements, the Landlord may require consent with respect to these and  by the operation of the Statute, this consent should not be unreasonably withheld or delayed.

Repair and Decoration

Repair of the premises means restoration or replacement. The clause should specifically state what replacements are sufficient but they must be reasonable in all the circumstances. Renewal means the whole reconstruction. An obligation to keep the premises in repair generally requires the tenant to put them in repair if they were in disrepair at the time of the letting. Decorating premises should be defined and state how often the Landlord wishes the Tenant to decorate. This must be a reasonable requirement and should not require the Tenant to decorate in at least the last year of the term of a lease if he complied with previous dates.

Rent review and Rent free period

Rent review clause specifies the date for review of the rent. It can be upwards or downwards. it is important to check the provisions of a contract so that they do not damage the Tenant. Some of the clauses may be drafted in such a way that they damage the tenants position and the tenant may end up paying more. E.g. Rent free period can be negotiated  but it is important for it to be disregarded by the rent review.

VAT

The Landlords sometimes decide to charge VAT in order to recover the same on the costs of developing the property. The Landlord therefore opts to tax and waives  the exemption in relation to it. It may be difficult for prospective tenants to recover VAT therefore this provision in the lease may be less attractive to them.

Alienation- assignment, subletting

Assignment

Is a sale of a remainder of an existing term of a lease to some other party which will then become immediate Tenant of the Landlord? On the assignment the Tenant will be released from all covenants unless he signed Authorised Guarantee agreement (AGA). AGA is an agreement by which he guarantees to be responsible for the obligations of the incoming tenant, assignee. These clauses are often limited and prohibit any form of assignment or require the consent from the Landlord. By operation of statute such consent must be given (within reasonable time) unless it is reasonable to refuse.

Subletting

To sublet means creating another lease out of a superior lease. It must be for a period shorter than the superior lease. The current superior Landlord’s tenant will therefore become the immediate Landlord of a new subtenant. This clause can be limited and may prohibit subletting or require the consent of the superior Landlord or the Lender. Again the Landlord must give consent (within reasonable time) unless it is reasonable to refuse.

User

This clause allows the Tenant to use the property for whatever purposes he wishes unless it is expressly prohibited. Reasonableness provision does not apply here but the Landlord is not allowed to demand payment for consent.

Break clauses

Is a clause which specifies when and under what conditions the Landlord or the Tenant can terminate the lease? This clause normally specifies conditions which have to be fulfilled in order to trigger the operation of break before the tenancy can be lawfully terminated, if the particular conditions are not met, there will be no  lawful termination of this agreement.

An example of such a condition
  • The Tenant must have made all the rent payments due under the lease.

Forfeiture and other remedies

This clause specifies under what circumstances the Landlord can forfeit the lease.

Insurance clause

It is important for a solicitor to check that the Landlord bares the responsibility for insuring the property against insured risks. Further provisions should state that the Landlord will reinstate the premises in the event of any damage plus a provision for rent reduction in case this takes place and the option to terminate the lease.

General rule is that damage caused by an uninsured risk is a tenants responsibility, however  it is also usual that this is shared. A solicitor should check  the provision in the agreement as to who bares the responsibility for uninsured risks. There should also be a definition in the agreement as to what constitutes uninsured risks. Uninsured risks normally include  floods etc, a solicitor should make sure that  terrorism is included within the definition.

Code for Leasing Business Premises

The code is often considered when dealing with leasing business premises but it remains voluntary to be complied with.