There are a myriad of things which need to be considered when obtaining premises for your business – not least the size, location, suitability, the work and cost involved in fitting it out. But what do tenants need to consider on the legal side of things?
In a minority of cases a business will be obtaining a freehold property, but most often the premises will be rented from a landlord by way of a lease. The lease is a contractual document giving the tenant the right to occupy the property and sets out the terms their occupation is subject to.
Even a simple lease can contain an enormous number of clauses, some of which benefit the tenant, some of which benefit the landlord. There is no one size fits all solution, so here are five important clauses for any potential business tenant to consider when taking on a lease:
Term of the lease
A fundamental of a lease – no term, no lease. Commercial leases are much shorter than their residential counterparts, typically five to ten years. You may consider a longer term if you are putting a lot of work into fitting out a unit (for instance, a restaurant) and want to spread the cost over a longer period, or a shorter lease if you are just dipping your toe into the market and do not want to be chained to a property and its obligations. Remember – a longer lease gives the landlord greater security and is likely to put more bargaining power at your fingertips.
Security of Tenure
A surprising number of tenants are not aware of this. Security of tenure arises under the Landlord and Tenant Act 1954 and means that the lease will effectively continue at the end of the term. In addition, the tenant has a right for a new lease to be granted and there are only a limited number of ways a landlord can bring this arrangement to an end.
As a result of this, many landlords will require that the lease be ‘contracted out’ – i.e. the tenant waives their rights to renew. Obviously, a lease with this protection makes it more valuable to the tenant, especially where the premises are particularly suited to their needs. Conversely, a landlord may want a higher rent in recompense.
A rent agreed at the beginning of a lease may be considered cheap at the end of the term as inflation and market changes take hold. A rent review clause allows the landlord to change the initial contractually agreed rent. The two main points to review clauses are the frequency of review and the amount of increase.
The frequency can depend on the length of the lease, but they are usually after three or five years. The increase can be set out in the lease, the agreed market value, or based on the Retail Prices index.
Review clauses can be highly complex and deserve special attention to ensure the lease remains affordable. It should be noted they very rarely allow for the rent to decrease!
It may sound very science fiction, but alienation refers the to the tenants right to dispose of the property, usually by leasing or transferring to a third party. Some leases prohibit the tenant disposing of the lease completely, and most require the landlord’s consent. The more restrictive the clause, the less the lease is worth; if you cannot transfer it, it is worth nothing to anyone else!
There is also the matter of Authorised Guarantee Agreements, which mean a tenant can be held responsible for the lease rent even after they have transferred it. It’s important to consider what you are able to do with the lease and what you will remain liable for, particularly if starting a new enterprise.
Liability under a lease does not end if a tenant just decides to walk away – it is a contract after all. Break clauses allow either the tenant or landlord to end the lease formally before the term is up and thus bring liability to an end. This is great for the tenant, but not so good for a landlord who relies on the income.
Consequently, break clauses generally only allow the lease to be terminated after a minimum period and when certain conditions are met. There is a danger that if these conditions are missed, then the right to break is also missed.
Additionally, a landlord’s break clause allows them to end the lease at a point that may be most inconvenient for the tenant.
Leases are very complex documents which try and balance the needs of a tenant with the demands of a landlord. These five clauses are by no means the most important in a lease; the document must be seen in the whole. However, they do give a flavour of the legal complexities which need to be considered when a tenant takes a new property.
Negotiated well, a lease can lead to a long and fruitful relationship between the landlord and tenant. Consider what your business needs carefully however, and always take advice as there are many hidden dangers in a poorly drafted lease; remember – sign in haste, repent at leisure!
The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.