Avoiding nasty shocks at end of your lease

31/07/2010

By Sarah Easton, Senior Associate in Commercial Property & Development. Featured in Kent on Saturday.

When setting up a new business or moving to new business premises tenants will consider all sorts of start up costs and many of these will relate to leasing new business premises.  These costs may include legal costs, surveyors' fees, search fees, a rent deposit, Stamp Duty Land Tax and fit out costs, but how many tenants think about the costs at the end of their lease?  Probably not many, but they should.

At the end of the term of the lease a tenant is required to 'yield up'.  This essentially means the tenant has to hand back the premises to the landlord.  Sounds simple, but it is not just a case of handing back the keys.  The tenant will have had various obligations under the lease including keeping the property in repair, clean and properly decorated.  The lease will also usually contain obligations relating to alterations and signage.  Generally a tenant remains liable beyond the end of the lease for breaches of its obligations which occurred during the term of the lease.  The landlord is able to sue the tenant in the event of any breach.

There may well be specific obligations requiring a tenant to remove fixtures and alterations at the end of the lease and put the property back into the state it was in at the beginning of the lease.  This could be expensive and it may be unnecessary. 

The tenant should speak with the landlord to clarify whether any of the alterations, etc., may be of use to the next tenant or maybe the landlord intends to completely gut the premises and carry out a refurbishment. 

When negotiating a lease a tenant should include an obligation requiring the landlord to notify it if it wants removal of any alterations and even better only if it is reasonable to do so.  However, the landlord wants to be able to relet the property as soon as possible and therefore needs the property to be in the best possible condition.

If the tenant has not repaired the property the landlord may serve a schedule of dilapidations on the tenant.  This will set out all items of disrepair and a cost for putting them right.  Usually a landlord will not require a tenant to carry out the works but will require the tenant to pay for the cost of the works and will also require the tenant to pay a sum equivalent to the rent that would have been payable for the length of time it takes for the works to be carried out.  The tenant will also have to pay the cost of the preparation of the schedule of dilapidations.

A tenant should ask for a limit to be placed on the time a landlord can serve a schedule of dilapidations otherwise the tenant could find itself left open to a claim for many years after the lease has come to an end.  When considering a limit the landlord should think about how long he realistically needs to arrange an inspection and survey of the property.  This will very much depend on the type of property but three to six months after the end of the term should be sufficient.

Tenants should speak to their lawyer to ensure they are fully advised of their obligations both during and after their lease.