An awareness of tenant-adverse terms in a commercial lease is invaluable in the modern business landscape. It allows you to avoid complex and expensive litigation, the cost of a feud between your business and your landlord and can see you wriggle out of onerous and pricey obligations under a property agreement.
It is an awareness that comes naturally to some, but which escapes others. For those who think that their understanding of terms in a lease could do with a tune up, we have written the below article. If, however, you want iron-clad, industry-specific knowledge, we recommend you instruct us directly in a matter.
How Long is Too Long?
Commercial leases can vary widely in terms of their length.
The length of time appropriate for your business will be dependent on a variety of factors such as: (1) the nature of your business, (2) expansion plans, (3) how long you have been in business, and (4) the purposes for which you wish to use the land. This list, however, is not exhaustive and certain bespoke circumstances may cause for some serious consideration regarding the length of the lease.
An example of how such variables can impact on the correct length of a lease for your business would be if you were a new company or entity just starting out, such as a haulier with three vehicles, renting a premise to use as an Operating Centre. If you expand to housing ten or fifteen vehicles, you want your lease to provide flexibility to move on, not tie you in to a long-standing contractual agreement which is no longer suitable. Therefore, a short-term lease would be more appropriate.
Time is Money
Be wary of the landlord who demands both a rent deposit and a personal guarantee from you as part of the commercial lease. One of the two may be appropriate but including both as requirements under a lease is far too onerous. From the perspective of a tenant, it may be more favourable that you pay a one-off, upfront rent deposit, instead of providing a lengthier guarantee that may bite later and put your personal assets (such as your home) at risk.
Another scenario that may impact on the figures involved in a commercial lease is where the agreement provides for rent reviews.
Tenants sometimes reject a review of a rent, where at the time of review the landlord is in breach of his obligations to maintain the property or cover some form of expense. In order to compromise in such an instance, it may be worth allowing for such a review in the contract, on the proviso that a landlord cannot benefit from a rent review, increasing the amount of rent, where the tenant has notified them that they are in repeated breach of their obligations and have failed to remedy this within a reasonable time.
It is also common to see a provision in a lease stating that the effect on rent of improvements made by the tenant will be ignored on review. This means that the landlord will not pay credence on review of the rent to the fact that the tenant has incurred expenditure in trying to improve the property.
Maintaining a Property
Under certain leases, a tenant is required to covenant to maintain the property to which the lease relates. In such circumstances a tenant should ensure to restrict their obligations under a commercial lease to simply keeping the property in ‘repair’ as opposed to raising the standard to which they agree to keep and promising to keep the property in ‘good repair.’
Further, where the property is a new build, the tenant should probably seek to exclude liability for disrepair caused by inherent defences and/or remedying the inherent defects. Thus, by doing so, the tenant avoids incurring cost for poor quality of work of inherent defects introduced into the property by the contractors or builders employed.
It is also important that there is some liability apportioned to someone for such defects. Where the tenant excludes liability from being placed on themselves for such defects, they should look to assign such liability to the landlord. This means that the landlord is contractually required to remedy the defect. If the tenant simply excludes liabilities from themselves without landing it elsewhere, then the defect may go unremedied for a prolonged period of time.
According to the Lease Code 2007, the tenants’ repairing obligations should be appropriate to the length of the term and the condition of the premises at the start of the lease. This should, therefore, be borne in mind when excluding liabilities.
All Good Things Come to an End
Serious consideration should be had regarding how a commercial lease is to come to an end. Where a tenant is in breach of their obligations, particularly repeated breach of the obligation to pay rent, a landlord can declare the lease forfeited. It is in the tenant’s best interests to ensure that there is due process in place as implemented by the lease, to prevent a landlord suddenly and abruptly ending an agreement and disrupting your business and your business planning.
It is advised that tenants check that their lease:
- Requires a landlord to notify the tenant if the tenant is in breach
- Allows the tenant an opportunity to remedy any breach before the landlord can re-enter the property
- Provides for a period of grace to pay outstanding rent, before the landlord re-enters the property.
The landlord may also demand reinstatement of the property when the lease expires. Reinstatement is where the landlord requires the tenant to remove any permitted alterations they may have made to the property. Naturally, this can be costly and require a great deal of time to carry out to the requisite standard. Thus, it is important, again, that there be some procedure built into the commercial lease, preventing the landlord from demanding reinstatement without reason or warning. There should be a qualification written into the contract stating that reinstatement should only occur where it is reasonable to ask it of the tenant. Otherwise, tenants may find themselves having to spend a rather considerable amount bringing down or removing alterations from the property.
The above advice with regards to commercial leases is intended to instil within prospective tenants an awareness of just some of the terms in commercial leases that are likely to work against them and which might be construed as unfair – there are many more. It is at Backhouse Jones that we review leases of such a nature and – with your best interests in mind – make alterations or suggestions which protect you from any dispute or difficulty that may arise from such a document.
We do this by having consideration for your specific needs and utilising our extensive commercial experience to ensure that the commercial lease you sign is right for you and your business. For advice and assistance in this respect, contact Brett Cooper at 01254 828300.