Letting Your Premises - The Landlord's Perspective
For investors in commercial property, their motivation will be to maximise the return on their investment by way of income generation or capital growth.
In the letting market, the investor's primary concern will be with the direct income generated through rental. The landlord will need to ensure that the tenant is good for the rent and will seek references from their business contacts, bank and professional advisors. Heads of Terms may be agreed with the proposed tenant, subject to receipt of satisfactory references.
Many landlords find it useful to instruct a professional commercial property agent to market the premises on their behalf, vet any potential tenants and show them around the premises. They will also seek references from the proposed tenant and where a company, may request sight of the past few years accounts in order to ascertain the financial strength of the tenant and thereby whether they will be likely to be able to comply with their financial obligations under the lease (this is sometimes referred to as the tenant's covenant strength).
Should the proposed tenant be a newly incorporated company or not have a proven track record as a reliable tenant elsewhere, the landlord may wish to seek security in respect of the possible non-performance of the tenant's covenants. Suitable security could be individual/corporate or bank guarantees or a rent deposit of perhaps three to six months' rent for example.
The landlord should consider the taxation implications of the letting very carefully (such as VAT) with its professional advisors prior to agreeing Heads of Terms with the tenant.
Market conditions will affect how flexible the landlord is prepared to be in agreeing Heads of Terms with a proposed tenant. Just some of the issues of concern on which professional advice should be taken before agreeing Heads of Terms will be, the length of the term, respective repairing liabilities, the assignment/subletting provisions, the amount of the rent, the frequency of rent reviews, any rent free period and any break clauses giving either or both parties the right to terminate the lease before the end of the contractual term.
Thought will also need to be given to the ‘renewability' of the lease at the end of the agreed term. The Landlord and Tenant Act 1954 provides protection for business tenants whereby (in very simple terms) unless the application of the Act is excluded from the lease, then the tenant has the right to demand the grant of a new lease once the existing one has expired. This is unless the landlord can establish that one of the reasons set out in the Act applies in order to negate the tenant's automatic right to a new lease. For example, should the landlord wish to redevelop the premises or occupy them instead.
It is important for the lawyer to always remain mindful of the nature of the transaction and the type of premises. Commercial premises are not erected or let, on terms which necessarily dove-tail with the lawyer's precedent leases so our documentation is tailored to suit the building in question and the nature of the letting. As such, a good knowledge of the building is important. It is useful to ‘Google' the building to obtain an aerial view of the premises including the surrounding land to ensure consideration is given to the exact extent of the land to be included in the lease and whether any rights (of access for example over private roads or footpaths perhaps) are required. Photographs of the interior will assist in drafting appropriate rights and obligations. An understanding of the business to be conducted from the premises and its impact on the landlord's capital and income is crucial.
Our role is to ensure that the documentation produced to the tenant is drafted so as to ensure that the landlord's investment is protected as effectively as possible. This we achieve firstly by issuing an equitable but ‘landlord friendly' lease and thereafter through our negotiations with the tenant's solicitor. For example, we seek to ensure that the rent review provisions enable appropriate growth across the term of the lease, that the tenant is not able to assign the lease to a lesser tenant (with a weaker covenant strength) and that the tenant can be removed if they fail to comply with their obligations under the lease, be they financial or otherwise.
The capital investment is protected by maintaining the condition and thereby the value of the premises. Where they are not in a particularly good state of repair, perhaps needing redevelopment in the near future, then it is likely that a relatively short term will be negotiated whereas if the property is fairly new, the landlord will be looking to secure a longer term.
Many landlords will want the tenant to take full responsibility for the repair of the whole of the building including foundations and roof etc. unless they are only letting the interior of premises. Failure by the tenant to comply with its repairing obligations will enable the landlord to take action to enforce the tenant's covenant to keep the premises in good repair and in default, carry out any repairs itself but charge the cost back to the tenant.
In our negotiations with the tenant's solicitor, we will balance how much their proposed amendments could cost the landlord but in considering this, take an overall pragmatic approach. It is likely that the landlord will be concerned to ensure that a balance be struck firstly between getting the tenant into occupation as quickly as possible to ensure the income flow and secondly not conceding too much in respect of the terms of the draft lease by incorporating more ‘tenant friendly' provisions. Much will of course depend on the market conditions at any particular time such as an excess or shortage of suitable vacant premises within the locality and the negotiating strength of the parties which will be to some extent, dependent on the commercial reality of the situation.
The Code of Practice for Commercial Leases incorporates industry accepted points of common practice, which can assist in the negotiations with the tenant's solicitor in seeking to minimize the time spent arguing over the lease provisions and thereby keep the legal costs as reasonable as possible.
In the event that the landlord's interest in the premises is mortgaged to a bank or building society for example, their consent to the grant of the lease should be sought prior to completion.
On completion, the tenant will need to pay amounts in respect of rent, insurance rent and possibly service charge. Historically, rent is paid four times a year on what are referred to as ‘the usual quarter days', namely 25 March, 24 June, 29 September and 25 December. More modern leases sometimes provide for rent to be paid on 1 January, 1 April, 1 July and 1 October. Leases for a relatively short term may provide for rent to be paid on a monthly basis. As such, the amount of rent to be paid on completing the lease will depend whether that is the first day of any particular quarter/month otherwise this will have to be apportioned on a daily basis. Advance payments of service charge may also need to be apportioned.
Annual payments of insurance rent will no doubt require apportionment so that the tenant is only required to pay in respect of their time in occupation and not in respect of cover relating to a period before they moved in or completed the lease, whichever occurred first.
If a rent deposit has been taken from the tenant as security in respect of their performance of the tenant's covenants then if the tenant is a company registered in England or Wales, the rent deposit deed should be sent to Companies house for registration within 21 days of completion to ensure its security in the event of liquidation of the company. A court order may be required to enable registration outside of the 21 day limit.
In the event that the term of the lease is in excess of seven years then the tenant will need to register the lease at the Land Registry and their interest will be noted on the landlord's superior title on the Land Registry's centralised computer system.