A commercial lease is a legal document that records a contract or agreement between a landlord or tenant on the rent of a property for exclusive occupation of a defined property for a defined purpose. The definition was explained further in Bayfield Training’s latest webinar, an Introduction to Commercial Leases, by Anthony Banfield, director of Banfield Real Estate Solutions and a senior trainer for Bayfield Training.
In the webinar he briefly set out the standard terms of a lease; the differences between a lease and a licence and explained contracting out, as well as the latest RICS code of leasing. This was intended only as a brief overview and delegates were advised to seek proper legal advice.
Standard terms of a commercial lease
1) Identification of the property to be leased
This can be through various forms such as a plan, description or an address. At its heart however is sufficient information to be able to identify the property.
2) Parties to the lease
The lease will also clearly set out the parties involved in the lease, including the lessor or landlord, lessee or tenant and possibly guarantors too.
3) Length or term of the lease
The lease start date will be confirmed, as well as its length. Lease terms can be any number of years and typically commercial leases used to be around 25 years. This has gradually reduced to an average of around 7.5 years today. Length also varies on type of use. For example, retail tenants will generally want longer periods to write off the cost of their shopfits Banfield explained, whilst office tenants tend to prefer the flexibility of shorter terms.
The lease may also include break options, allowing tenants to terminate the agreement and walk away , for example from a ten year lease at a break option of five years. “This obviously has implications for valuation because you can only be sure the tenant will have the lease up to the time when they could exercise their break option,” said Banfield. However, break options can also be used by the landlord – for example a landlord wanting to redevelop a property may insert a break option for the time he or she plans to redevelop.
4) Rent payable and due
The lease will also include the rent payable and when it’s due. This is usually quarterly in advance in the UK, although payment in arrears is possible for some older leases. However, this also varies globally. In Europe it can be on a monthly basis in advance or in areas with high inflation, such as Nigeria, annually in advance.
5) Permitted use of the property
The permitted use of the property will also be defined within the lease. “From a landlord’s point of view we want to restrict that to a certain extent – we don’t want the tenant to be able to have riotous parties there for instance if it’s a commercial lease. We may also only want them to open and shut at certain times of the day,” said Banfield., but if it is too restrictive it may adversely affect the rent.
6) Right and obligations
The commercial lease will set out the responsibilities and obligations of both parties, such as for repair and redecoration. If such obligations are being met by the landlord then the lease may also include a service charge which will cover that additional cost. This often depends upon the type of property. “If you’ve got a multi-occupied property then from the landlord’s point of view it’s better that they carry out the repairs and redecoration to get consistency. If the tenant occupies it solely themselves then it’s perhaps better from their point of view that they are in charge of all repairs and redecoration,” explained Banfield.
7) Rights of alienation
The right of alienation is the right to assign or sublet your lease, such as because your business has changed and no longer fits the space. “It’s up to the parties when negotiating the lease to set out what rights there may be,” said Banfield. “However not having such an option can be restricting for the tenant”, he warned. “It means they are on the hook for the full amount of the rent, repairs and so on up until the end of the term, whereas if they could assign it to someone they are passing these obligations to another party.” Subletting can help to minimise this by the sub-tenant taking on the lessee’s responsibilities, but the lessee is still liable to the landlord.
8) Other matters
Other matters will include things such as rent review provisions, particularly in longer term leases, which allow the landlord to increase the rent during the period to cover things such as inflation. This will also be set out clearly in the lease in terms of how it would work, particularly in instances such as where the tenant has carried out and financed improvement works themselves and therefore should not be obliged to have to pay a higher rent as a result.
Reservations covers various items such as shared pipes and ducts and their condition.
Code of Leasing
Banfield referred delegates to the RICS Code of Leasing 2019, which is coming into force shortly, which sets out that negotiations should be carried out in a “constructive and collaborative manner” and includes a lease code and suggested heads of terms, so that all parties have a clear understanding of the commitments that they are entering into.
Lease v licence
The webinar also defined lease and licence, and the different between the two since what is claimed to be a licence can sometime actually be a lease. “It doesn’t matter whether the document states it is a lease or a licence – the court looks to the effect of it,” he said.
A licence is a personal permission for someone to do something on a landowner’s property, giving little security and with the ability for either side to cancel the licence on short notice. A lease meanwhile has three components, according to a leading case Street v Mountford (1985). They include exclusive possession, a fixed or periodic term certain and in consideration of a fixed sum or periodic payments. Banfield explained that if those three components were met then even if the document is called a licence it is effectively a lease. “If it doesn’t satisfy these conditions, whether it calls itself a lease or a licence then it is a licence,” he said.
The Landlord & Tenant Act 1954 Part II gives security of tenure to business tenants. This allows them the ability to retain the space through a new agreement at the end of the lease. “Whilst you may have got a lease for ten years if it falls within the 1954 act as a business tenancy then you may not have to give up possession at the end. You can hold over and you can request a new lease from the landlord on similar terms to the existing lease, apart from perhaps the rent being increased or decreased to take into account market conditions.” The landlord may be able to resist a renewal on limited grounds– most notably disrepair or late rental payments but also for occupation for their own use or for development. They also have rights to offer suitable alternative accommodation to tenants in certain circumstances, such as when refurbishing an office block floor-by-floor.
If a request for renewal is turned down then potential compensation can be sought by the tenant. Such rights exist unless at the inception of the lease both parties have agreed to be excluded from the protection afforded by the provisions for the Landlord &Tenant Act, Banfield explained.
To have done so they would need to have applied via the courts for contracting out of the act. “In those circumstance if both parties are aware of what they are giving up by way of rights then the court will agree it can be contracted out of the act. That means at the end of the term the tenant has to give up possession on the last day and if they want to negotiate a new lease then they are in the same position as anyone else wanting to come along and take a lease on the property.”