Introduction To Commercial Leases
1. A Lease is characterised by the land owner (referred to as the Landlord or Lessor) granting exclusive possession of the property to a Tenant (often referred to in a Lease as a Lessee) for a fixed term at a specified rent. Whilst a simple document incorporating these issues signed by both parties would constitute a Lease, leases are generally lengthy documents, which regulate the relationship between the Landlord and the Tenant as carefully as possible. The parties need to be fully aware of what they contain to fully understand their respective obligations. Particularly for a Tenant these obligations can be onerous.
Rent
2. Whilst the question of rent should be simple, there are a number of issues which may have to be considered, for instance, will VAT be added to the rent;? Is there to be a rent-free period granted to the Tenant to allow them to do works to the property? Is there to be a rent review? All of these issues require consideration and indeed careful drafting. For example in respect of rent reviews it needs to be clear as to how the property will be valued on rent reviews so that the Tenant pays the reviewed rent on a basis appropriate for the type of property and the type of Lease.
Use Of The Property
3. Leases usually restrict how the premises can be used. This is often linked to the planning permission but sometimes, particularly in respect of commercial units in shopping centres or parades, the use is very specific so as to ensure that a Landlord has a proper mix of businesses at the development and that there is no unreasonable competition between two Lessees.
Repairing And Obligations
4. Commercial Leases are usually full repairing and insuring (FRI) Leases. This means, for example, that if a property is a single unit the Tenant will normally have to arrange insurance and pay the premium and arrange and pay for all repairs to be carried out to the property.
5. An obligation to repair is also interpreted as an obligation to put a property into good repair so that the Tenant will have to ensure that the property is properly maintained and decorated. This can be expensive for a Tenant and advice on these issues is required at the beginning of a transaction. Furthermore, at the end of the term, however it ends, the Tenant will be required to put the property into a good and proper state of repair and decoration.
Assignment And Subletting
6. Leases very often restrict the Tenant’s ability to assign or sub-let. Whilst absolute prohibitions on assignment are unusual the Landlord will seek to ensure that such assignment can only be done with his consent. Careful drafting and negotiation is required to ensure that the basis on which the Landlord grants consent is not unduly onerous.
7. Landlords often impose strict prohibitions on sub-letting and once again the conditions must be considered carefully to ensure that they are reasonable in all the circumstances. A Tenant should be aware of any such restriction.
Termination Of Leases
8. Whilst one of the characteristics of a Lease is exclusive possession for a fixed term, a Landlord can bring a Lease to an early end in the event that the Tenant is in breach of any of the covenants in a Lease. The Landlord can peaceably re-enter without a Court Order in the event that the Tenant fails to pay his rent within a specified time of the due date. This contrasts with residential tenancies where a Court Order would be needed. However, in the case of any other breach of covenant a Landlord must first give a Tenant notice of the breach and give them time to remedy the breach before bringing an application to the Court to determine the Lease. However, it must be clearly understood that commercial Leases usually reserve payment of Service Charge and insurance premiums as rent so that if these sums are not paid on the due date the Landlord can forthwith forfeit the Lease for non payment of rent.
9. At the end of the term a Tenant is usually entitled to grant of a new Lease on commercial terms. The Landlord can only object to the grant of a new Lease on one or more of seven grounds. One ground is of course persistent non payment of rent but it is within the Court’s discretion to decide whether or not a new Lease should be granted. However if the Landlord can show that they want the property for themselves, or that they want to redevelop the property then a new Lease cannot be granted. To forestall such disputes Landlords often seek to ensure that when the Lease is granted the security of tenure provisions of the Landlord & Tenant Acts are specifically excluded. If such proposals are made it is necessary for a Tenant to be carefully advised and for the formalities to be entered into before the Lease is granted.
