Commercial property expert Bryn Morgan answers questions on leases
Q: How long should my commercial lease be for?
A: This depends on the circumstances, your needs and what the landlord will agree. It used to be that a standard commercial lease was for 25 years, but now they are commonly between five and 15 years, and can be shorter. If a lease is for longer you will have the certainty of being there for a longer time, but there could be greater liabilities if you need to move but have difficulty in assigning (selling) the lease. Consider adding flexibility by negotiating a 'break clause' which will enable you to end the lease early on giving notice. Beware, though: break clauses may have conditions attached.
Q: Will I be liable under the lease for the whole term?
A: If you do not assign (sell) the lease then yes. Otherwise, for most leases granted after January 1, 1996 your liability will end once you have lawfully transferred it to another person. However, most modern leases enable the landlord to demand you enter into an 'Authorised Guarantee Agreement' when transferring the lease. This would make you liable for the new tenant's performance of the lease obligations until such time as the lease is transferred to another tenant.
The lease is likely to place restrictions on assigning it and underletting. Many will completely prohibit sharing or underletting part of the property and you should consider how such restrictions may affect you.
Q: What about repairs?
A: Quite often leases are drafted with repairing obligations which can make the tenant responsible for putting the property in a better state than when they entered into the lease. As a general rule the shorter the lease, the less onerous the responsibility on the tenant. Be careful about indirect liability for major repairs through any service charge, though.
One way of limiting your obligations is to include into the contract a schedule of condition (preferably with photographs attached) prepared by a surveyor, describing the condition of the building at the outset of the lease. You could also agree a 'cap' on the level of service charge.
Q: Is there any way I can limit my liability in case things
go wrong?
A: One common way is to try to have the lease taken in the name of a limited liability company. If you are already running a business through a limited company you may even wish to consider setting up a separate company for the purpose of holding the lease to shield the assets of the trading company. However, there are additional administration costs and statutory obligations in running a company. The landlord will often only agree to a letting to a new company if a security deposit is paid and/or personal guarantees are given by directors or a parent company.
Q: What does 'contracted out of the Act' mean?
A: The Act is the Landlord and Tenant Act 1954 and provides that in many cases a business tenant is entitled to a new lease after the expiry of the existing one. The only guaranteed way for a landlord to avoid this is to have a lease whereby this right is excluded, albeit there are certain grounds the landlord can rely on to 'reclaim' the property at the end of the lease even if the right is not excluded. Excluding the right requires certain procedural formalities to be observed. If you agree a lease which is 'contracted out' it means that you will have no legal right to a new lease at the end of the current one, neither will you be entitled to any statutory compensation.
Q: How do I go about agreeing terms of a lease?
A: Use a commercial estate agent who is experienced in dealing with the type of property you are trying to let and/or a commercial property solicitor. You may also need a surveyor.
Q: What else do I need to think about?
A: It is difficult to cover everything, but some major points include whether you can use the property for your intended purpose. Your use, for example, may require planning consent, or you may feel that alterations must be made to the premises. If so, you may wish to consider negotiating a rent-free period to cover the time taken for the alterations. You should also ensure that any necessary licences can be obtained and give consideration to the tax implications.
Q: Why do I need a lawyer to negotiate my lease?
A: Leases are strictly construed, which means that each word may be looked at in a technical way by the courts in the event of a dispute. The liabilities are so great that it is wise to take the utmost care before committing yourself. The terms of the lease are also likely to impact on any rent review.
Bryn Morgan is a commercial property solicitor at Sykes Anderson LLP.
Q: How long should my commercial lease be for?
A: This depends on the circumstances, your needs and what the landlord will agree. It used to be that a standard commercial lease was for 25 years, but now they are commonly between five and 15 years, and can be shorter. If a lease is for longer you will have the certainty of being there for a longer time, but there could be greater liabilities if you need to move but have difficulty in assigning (selling) the lease. Consider adding flexibility by negotiating a 'break clause' which will enable you to end the lease early on giving notice. Beware, though: break clauses may have conditions attached.
Q: Will I be liable under the lease for the whole term?
A: If you do not assign (sell) the lease then yes. Otherwise, for most leases granted after January 1, 1996 your liability will end once you have lawfully transferred it to another person. However, most modern leases enable the landlord to demand you enter into an 'Authorised Guarantee Agreement' when transferring the lease. This would make you liable for the new tenant's performance of the lease obligations until such time as the lease is transferred to another tenant.
The lease is likely to place restrictions on assigning it and underletting. Many will completely prohibit sharing or underletting part of the property and you should consider how such restrictions may affect you.
Q: What about repairs?
A: Quite often leases are drafted with repairing obligations which can make the tenant responsible for putting the property in a better state than when they entered into the lease. As a general rule the shorter the lease, the less onerous the responsibility on the tenant. Be careful about indirect liability for major repairs through any service charge, though.
One way of limiting your obligations is to include into the contract a schedule of condition (preferably with photographs attached) prepared by a surveyor, describing the condition of the building at the outset of the lease. You could also agree a 'cap' on the level of service charge.
Q: Is there any way I can limit my liability in case things
go wrong?
A: One common way is to try to have the lease taken in the name of a limited liability company. If you are already running a business through a limited company you may even wish to consider setting up a separate company for the purpose of holding the lease to shield the assets of the trading company. However, there are additional administration costs and statutory obligations in running a company. The landlord will often only agree to a letting to a new company if a security deposit is paid and/or personal guarantees are given by directors or a parent company.
Q: What does 'contracted out of the Act' mean?
A: The Act is the Landlord and Tenant Act 1954 and provides that in many cases a business tenant is entitled to a new lease after the expiry of the existing one. The only guaranteed way for a landlord to avoid this is to have a lease whereby this right is excluded, albeit there are certain grounds the landlord can rely on to 'reclaim' the property at the end of the lease even if the right is not excluded. Excluding the right requires certain procedural formalities to be observed. If you agree a lease which is 'contracted out' it means that you will have no legal right to a new lease at the end of the current one, neither will you be entitled to any statutory compensation.
Q: How do I go about agreeing terms of a lease?
A: Use a commercial estate agent who is experienced in dealing with the type of property you are trying to let and/or a commercial property solicitor. You may also need a surveyor.
Q: What else do I need to think about?
A: It is difficult to cover everything, but some major points include whether you can use the property for your intended purpose. Your use, for example, may require planning consent, or you may feel that alterations must be made to the premises. If so, you may wish to consider negotiating a rent-free period to cover the time taken for the alterations. You should also ensure that any necessary licences can be obtained and give consideration to the tax implications.
Q: Why do I need a lawyer to negotiate my lease?
A: Leases are strictly construed, which means that each word may be looked at in a technical way by the courts in the event of a dispute. The liabilities are so great that it is wise to take the utmost care before committing yourself. The terms of the lease are also likely to impact on any rent review.
Bryn Morgan is a commercial property solicitor at Sykes Anderson LLP.
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