Leases on commercial premises

By Sarah Secker

A landlord should ideally grant a lease with a 'clear' rent.  This means that the landlord does not have to use the rental income to pay for the buildings insurance or any repairs.  This expenditure will be recovered separately from the tenant by way of an insurance rent and in certain circumstances, a service charge.

Preferably the lease will contain full repair obligations obliging a tenant to put the premises into good and substantial repair if they are not already in that condition.  A landlord should expect resistance to this if the building is not already in a good state of repair or if the tenant is only taking a short term lease.  The tenant may ask for its photographic schedule of condition to be annexed to the lease so they are not required to put the premises into any better state than as shown in their schedule.

If the landlord will be letting individual parts of a building to various tenants (for example, leases of floors within a building) then it is usual just to let the interior of each area.  The structural and external parts of the building are retained by the landlord which retains responsibility for repairing and maintaining those parts.  The landlord obtains reimbursement from the tenant via a service charge.  This could be a formal arrangement whereby the tenant makes estimated payments quarterly in advance with a year end reconciliation once the actual expenditure for the service charge year is known.  Alternatively, there could be an informal ad hoc service charge so that the tenant is only required to reimburse the landlord as and when repairs and maintenance are undertaken.

Query whether there should be rent reviews during the term of the lease. Commonly there are ‘upwards only’ rent reviews every 3 to 5 years. There are different mechanisms to review rent and sometimes it may be referenced to the RPI (Retail Prices Index) or you could agree stepped increases at the outset.

Consider if your tenant wants to undertake fitting out works at the start of the lease term. You may be asked for a rent free period whilst such works are being carried out.  Structural alterations are usually prohibited but non-structural alterations are often permitted with the landlord's consent which cannot be unreasonably withheld or delayed. The tenant’s application for consent should be accompanied by full details of the planned works and you may wish to instruct a surveyor to review them.

If your property is mortgaged then it is most likely you will need to obtain your lender’s consent before you grant the lease.  If there is a superior landlord you may need their consent too.

It is very important to assess the ability of the tenant to perform its lease obligations, particularly if it is a newly established business or company.  It may be appropriate to ask for a rent deposit and/or guarantor from a tenant to provide some security in the event of default.  You will need to keep the tenant’s deposit in a separate account specifically for that purpose.

Please note these are general principles and each lease should be individually checked.  Contact Sarah Secker at the Commercial Property Department at Sampson Coward on 01722 410664 for more information and advice.

Sarah Secker