Entering into a lease of business premises as a tenant can be daunting, not least because of the financial commitment but also the numerous obligations that must be complied with. It is important for tenants to consider at the outset what provisions the lease will cover and what they will be agreeing to. We have highlighted below just some of the key considerations of any business lease.
The length of the lease may be a number of months or years. Long leases of more than 10 years are less common nowadays as businesses aim for flexibility but this is ultimately down to negotiation with the landlord.
Tenants of commercial leases have a statutory right to remain in occupation and to ask to renew their lease when it comes to an end. This right can be excluded by “contracting out” the lease but if it is included, it is a valuable right for a tenant which may attract a higher rate of rent and brings with it a number of statutory requirements that must be complied with when the lease is eventually brought to an end.
If the lease is granted for a longer period, a tenant may wish to negotiate a break right i.e. the opportunity to terminate the lease early. It is important to carefully draft the terms and any conditions of the break clause so that they are clear and can be complied with.
Rent and other charges
A tenant should always check if the rent and any premium payable will attract a liability to pay Stamp Duty Land Tax (SDLT).
Longer leases often provide for the rent to be reviewed and increased to market value or in line with inflation. The procedure for agreeing the level of reviewed rent must be carefully negotiated so that the tenant avoids paying a much higher rent further down the line. Rent review provisions may also impact the level of SDLT payable.
If there are common areas which the landlord is responsible for maintaining, the landlord may charge a service charge in addition to the rent. The lease must set out how the service charge is calculated and what costs it should include.
The Royal Institute of Chartered Surveyors (RICS) has recently published a new Service Charge Code as the best practice for the administration of service charges for commercial properties. The Code will be compulsory for RICS members but may suggest standards to be imposed across the board and that tenants look to include in leases. The Code states for example that service charges should exclude costs in excess of normal maintenance, repair or replacement and exclude costs attributable to void premises, and the landlord’s management of the premises, such as the costs of collecting rent. The Code also provides that leases must include provisions for service charge disputes to be resolved by alternative dispute resolution (ADR) as a cost-effective alternative to court action.
Repair and insurance
A tenant must ensure that they understand their repairing and maintenance obligations. Leases are often referred to as “FRI”, meaning that the costs of all repairs and insurance are borne by the tenant. This is notwithstanding that the landlord may take out the insurance for the premises itself and may maintain any common parts.
Usually, the only exceptions to a tenant’s repairing obligations under an FRI lease relate to where damage is caused by a risk that is insured against. If the landlord is obliged to ensure the premises it should be their obligation to also use insurance proceeds to reinstate the premises if they are damaged – a tenant should also look to negotiate a break from paying rent during the period of reinstatement.
A tenant should inspect the premises at the outset and obtain a survey to ensure they are in good repair. In the event that they are not, the tenant’s maintenance obligations under the lease should be carefully considered and perhaps exclude certain parts or limit maintenance obligations to the current state of the premises evidenced by photographs.
Minimum Energy Efficiency Standards (MEES)
It is now unlawful for landlords to grant leases of properties that have an Energy Performance Certificate (EPC) rating below “E” unless an exemption applies. A landlord is legally obliged to provide a tenant with a copy of the EPC at the outset of the lease negotiations.
Because of the implications of MEES, landlords are inclined to impose an increasing number of relevant provisions in leases. Tenants may be prohibited for example from carrying out any alterations to their premises which may have an adverse impact on the EPC rating - some landlords may argue that this even includes erecting demountable partitioning and so the scope of any prohibition should be clear in the lease.
A landlord may be able to rely on an exemption to MEES if they fail to obtain the tenant’s consent to carry out improvements to bring the premises up to the required rating. A tenant could, therefore, consider making the ability for the landlord to carry out works to improve or maintain the EPC rating of their premises conditional on their consent being obtained. The lease should also be clear as to who will bear the costs of any such works.
A lease creates contractual obligations and a tenant should seek legal advice from the outset – the above is a mere indication of just some of the significant points to consider.