Taking a commercial lease: The main points to negotiate when agreeing the Heads of Terms

Note: It may seem obvious, but it is important to ensure that these details are stated correctly, in particular, the parties’ full names. The details may be copied over to the draft documentation together with any errors or misspelling!

Note: Again, this may seem obvious, but we have seen a transaction being delayed significantly due to the instructed solicitor not knowing they were indeed instructed!

Note: it is important to have clarity as to the extent of the premises to be leased (or as the lease may often state ‘demised’) and as to what is included, such as whether the lease will be of the internal and non structural parts or the whole building / part of building, and any additional areas like bike stores or parking spaces, for example.

A lease often holds the tenant responsible for the repair and condition of the ‘demise’, and so what is included within it will fall within the tenant’s repairing liability. If the lease is of the whole, the roof and structural parts will be included.

Equally important is to record any additional rights that were agreed between the parties, such as parking spaces, so they can be adequately protected in the lease.

Note: the lease term will have been one of the first points most tenants negotiated. However, equally important is to understand whether the lease is to be inside or outside of the Security of Tenure Provisions of the Landlord and Tenant Act 1954.

A lease ‘within the Act’ (or in other words a protected lease) allows a commercial tenant to remain in the premises when the lease ends and to request a new lease from their landlord, most commonly to be granted at the market rent. The tenant may also be entitled to compensation if the landlord successfully opposes the renewal.

Although many landlords would resist granting a security of tenure, as can be seen, it is worth negotiating this in case possible!

• Written notice of at least 6 months; and
• All rents and other sums demanded and due being up to date; or
• Vacating the property.

Note: Ending the lease early is most likely not high on the priority list when a tenant is taking up a new lease. Nevertheless, it is important that one’s position is protected.

The company’s circumstances can change as the business grows and the premises that are a good fit now, maybe not be suitable in a few years’ time. A break right will allow the tenant, or sometimes both parties, to end the lease earlier commonly subject to agreed conditions. These conditions will need to be reviewed carefully, as some may result in the break right to be easily frustrated by the landlord.

As in our example above, the break right is conditional on all rents being up to date and vacating the property. If the landlord demands a large payment a day before the break date, or links the break right to the repair and condition of the property, this may prevent the tenant from being able to exercise their contractual break right. Another important aspect to note, is to ensure that the lease expressly states that any rents paid up beyond the break date are to be refunded to the tenant, as in accordance with the applicable case law this cannot be assumed!

Note: If the break right cannot be negotiated or the date has passed, the tenant may want to consider other options for parting with the lease. Here, the alienation provisions will come handy. Alienation is a term that covers options for the tenant being able to transfer (assign) their existing lease to another party or underlet the premises to an undertenant. As it is common, the devil is in the detail.

The tenant should ensure that any conditions imposed by the lease are not unreasonable. As with the break clause, any condition for the lease payments being up to date and the tenant not being in breach of the lease conditions should be considered carefully.

One of the common conditions is the requirement for the outgoing tenant to provide an authorised guarantee agreement for the new tenant’s liabilities under the lease. This should only be required if reasonable and alternatives such a rent deposit by the new tenant could be a reasonable alternative.

Note: the amount of rent will be one of the first items to agree but a tenant will need to ensure that they are clear as to whether VAT is payable as well as how the payments are to be arranged (e.g. most commonly quarterly).

Note: it is common for a commercial lease to have a rent review clause which allows the landlord to review the lease rent on the given review date with the view to increase it. Usually this ties in with a break option.

The important aspects to negotiate would be the mechanics of the rent review (e.g. open market rent review or fixed increases for example) and the precise dates so there is no confusion.

Note: one of the aspects tenants may often be unaware of is that if the lease requires them to ‘keep the property in repair’ means to address any disrepair that the property is in. The best way for tenants to protect themselves is to agree with their landlord provision of a photographic schedule of condition before the lease is signed.

The schedule would normally be prepared by the tenant which adds to the costs. However, the benefit of the schedule cannot be understated particularly for older properties. When the lease ends, the landlord will typically consider any items in need of repair and set out the costs it will be seeking from the tenant to cover these repairs. This sum can often be much higher than the tenant would expect! Having the schedule of condition agreed at the outset can protect the tenant from the unexpected costs after the lease ends and avoid any unnecessary disputes.

Note: the permitted use should always be confirmed. A tenant should always be careful however that the permitted use in the lease is also the use authorised by the local authority, further to planning permission, for example.

Internal non-structural alterations permitted subject to first obtaining the landlord’s consent (not to be unreasonably withheld or delayed).

Note: a landlord is unlikely to allow structural or external alterations (save that when renting a shop, the front of the building is often also rented to the tenant) but internal and non structural works should be permitted, with consent. The process can take a while and so any initial works should be agreed before the lease is granted, so works can commence once access is granted.

Note: a landlord will usually insist on a deposit, in case the tenant stops paying rent or leaves the property in a poor state. A deposit for the equivalent of three months rent is fairly standard, but newly incorporated companies or those with weak financial strength often have to pay more.

The new lease is subject to the following:

• Planning permission for change of use
• Landlord’s initial fit out works

Note: again, it may seem obvious but it is important to agree a realistic clear deadline for completion, taking into account the time needed for the property searches being retuned. Equally important is to record at the outset any conditions such as obtaining planning permission or the landlord carrying improvement works to the property.

The property may not be fit for the tenant to commence their fit out work, if that’s the case, then the landlord’s works should be pre-agreed and set out in a legal document, with binding obligations, such as an agreement for lease (also known as a pre let agreement).

This can save time as both parties will be working to the same timescales and will have clear understanding of any potential external factors that could cause a delay.