Taking a Lease - The Tenant's Perspective
Renting premises at a market rent as opposed to buying freehold/long leasehold premises demanding a large financial investment, frees up capital to run your business venture. Therefore, taking a new lease direct from the landlord or an assignment of an existing lease from an existing tenant, for many, will be an attractive option, offering more flexibility to the business. It is easier to rent premises and walk away at the end of the term, than buy outright and have the burden of marketing and selling freehold/long leasehold premises in a sometimes unfavourable market.
Any landlord will want to ensure that their prospective new tenant will be good for the rent and will comply with their obligations under the lease. As such, a new tenant may be asked to provide references from their bank, business contacts and/or professional advisors. If a company is taking the lease, the past few years' accounts are likely to be requested so the landlord can ascertain the proposed tenant's financial strength. If the proposed tenant is considered to be a little weak, security in the form of a rent deposit or a bank or individual/corporate guarantee may be requested.
Running a profitable business is essential and as such, every cost needs to be accounted for. The tenant will need to know the full occupation costs which include rent, service charge, rates and insurance. It is important to be aware of the cost of running the premises to enable those taking the lease to budget accordingly. In addition to running costs will be the cost of repairs. A tenant must be very clear on exactly what they will be responsible for in terms of repair and whether their liability would extend to repairs such an inherent defects, arising from a problem with the initial construction perhaps.
It may be necessary for the new tenant to carry out fit out works to suit the particular use to which they will be putting the premises, be it as a shop, office, factory etc. Consent for these works will more often than not have to be obtained from the landlord and the tenant may be required to enter into a licence to alter the premises which can oblige the tenant to reinstate the premises to its original condition (prior to the alterations) before vacating.
Particular issues will need to be dealt with in the event that the tenant looks to take a lease of new premises. Here consideration should be given to excluding liability from the tenant's repairing covenant for repairs arising out of any latent or inherent defects in the building and collateral warranties should be sought from the contractors.
If the premises are in the process of being built, an agreement for lease may be entered into whereby the tenant contracts to take the lease on completion. An agreement for lease may also be used where the landlord or the tenant is to carry out any works to the premises prior to the tenant taking occupation and this obliges the parties to do the works in question and the tenant on completion to take the lease.
Heads of Terms - Grant of a New Lease
Issues of concern to most tenants entering into a new lease will include the amount of the rent, the frequency of rent reviews, the term of the lease, how easily they will be able to assign/sublet if required, whether they can terminate the lease before the end of the contractual term by exercising a right to break, what sort of alterations they may carry out at the premises either with or without the landlord's prior written consent and how onerous their repairing liability will be, to name but a few.
Some tenants find it helpful to instruct a commercial property agent to act on their behalf in agreeing the Heads of Terms. It is useful to have the input of a professional at this stage to ensure the tenant obtain the best possible terms from their point of view. We have close links with a number of local commercial property agents so should be happy to make some recommendations if required.
Where the tenant is going to have to take time and spend money in fitting out the premises so they are fit for the use proposed, they may wish to seek to agree a rent free period with the landlord to limit their outgoings at the initial stages when expenditure is high but the tenant may not be in a position to trade.
Thought must be given to whether or not the tenant wants to be able to demand a new lease from the landlord at the end of the term of the term of the initial lease. Business tenants are offered some protection by the Landlord and Tenant Act 1954 which seeks to ensure tenants may expect an automatic renewal of their existing lease to ensure the continuity of the business from the premises in question. Landlords often like to exclude the provisions of this act from lettings as this gives them more flexibility in what they should like to do with the premises at the end of the initial term. If the Act is not excluded and the tenant requires a new lease, it is for the landlord to demonstrate one of the reasons specified in the Act, to override the tenant's automatic right to renewal, for example, where the landlord wants to redevelop the premises or wishes to occupy them instead of the tenant.
To incorporate additional flexibility for the tenant, termination provisions can be agreed to enable the tenant to vacate the premises during the term for whatever reason, perhaps if the business is struggling and needs to downsize its operation. A break clause can be exercised at any point during the term on giving the landlord, say, six months' prior notice which would constitute a rolling break or could only be exercisable at particular points during the term, for example at the end of the third or fifth year perhaps.
The tenant's repairing liability can often be the most onerous and thereby potentially the most draining on finances. Most landlords will want the tenant to take responsibility for the repair of the whole of the building including the roof and foundations except where the tenant is only taking a lease of the interior of the premises. As such, the wording of the tenant's repairing covenant could require the tenant to put the premises into a better state of condition than at the time they take the lease. This onerous obligation can be limited by the tenant having a schedule of condition (usually both written and photographic) prepared by a surveyor which accurately records the condition of the premises just prior to the grant of the lease. The repairing covenant wording can them be amended by stating that the tenant must keep the premises in good and substantial repair and condition but in no better state than as evidenced by the schedule of condition which will be annexed to the completed lease.
Heads of Terms Assignment/Transfer of an Existing Lease
Where a tenant is taking an assignment of an existing lease there will be no lease terms to negotiate although if problematic, a deed of variation could be entered into with the landlord (if agreeable) to vary the lease provisions. An example of where this might be agreed is where the incoming tenant wishes to use the premises for a different use than as permitted by the existing lease. A tenant may wish to change the premises from a shop to a restaurant for example and if the existing lease only permits use as a shop, an amendment would need to be sought. Thought should also be given to the planning use permitted at the property from the planning authority's point of view, as this may not accord with what the lease permits. For more information on this please refer to the ‘Due Diligence' section below.
The tenant may also wish to make the Heads of Terms conditional on receipt of a satisfactory survey which should reveal any issues of concern relating to the fabric of the building and any possible repairs likely during the term of the lease. This can then perhaps be used as a negotiating tool to either ensure the landlord resolves any issues prior to the tenant taking occupation or that any problems revealed would not fall to the tenant to resolve. Again, a schedule of condition could be used to limit the tenant's repairing liability to ensure the tenant is not responsible for any pre-existing problems.
Where a tenant takes an assignment of an existing lease, the consent of the landlord will be required in advance of the assignment. In the same way as for the grant of a new lease, the landlord will be concerned to ensure that the incoming tenant is good for the rent and is likely to be able to comply with all the tenant's obligations under the lease. As above, references re likely to be sought and accounts requested. The landlord must not unreasonably withhold consent to the assignment. The outgoing tenant is usually responsible for paying the landlord's legal and surveyor's costs relating to the application for consent to assign the lease. Again, a rent deposit or guarantees can be requested from the incoming tenant.
Whether taking a new lease or the assignment of an existing lease, the tenant will most likely wish to carry out the usual searches and enquiries to ensure they have as full a knowledge as possible of matters relating to the premises for which they could be held responsible.
The most frequently undertaken searches include a local authority search which would provide information relating to the adoption of roads, public rights of way, planning and building regulation issues to name but a few together with a desktop environmental search, a drainage and water search, a search at the Land Registry to ascertain the ownership of any titles (ownership) out of which the lease is granted and perhaps some others types of searches specific to the particular area (brine, coal etc.)
The importance of these searches should not be underestimated as they could reveal an issue which may result in a proposed tenant deciding not to take a lease of those particular premises. The local authority search for example could reveal breaches of planning regulations for which the tenant could be held responsible and be required to remedy and the enquiries of the planning authority could reveal the use permitted by the lease does not accord with the planning use permitted by the local authority. The desktop environmental report could reveal contamination on the site again for which, the tenant as occupier could be called upon to rectify, the cost of which could be substantial.
Commercial Property Standard Enquiries are also likely to be raised, namely those applicable to the grant of a lease which will be provided by the landlord or those applicable on the assignment of the lease which will be provided by the seller. These enquiries provide general information about the premises, its history and its use.
Preparing the Documentation - Grant of a Lease
We will negotiate a lease tailored to your business and adapt the landlord's draft lease to suit the building. We will negotiate in an efficient and pro-active manner, rather than run up costs wasting time in unnecessary correspondence. Our practical approach ensures that we don't get bogged down with insignificant lease clauses. We seek to take a step back and see the bigger picture and the commercial issues important to the individual tenant.
As stated above, sometimes an agreement for lease will be entered into prior to completion of the lease itself. This is likely to occur where the premises are undergoing construction or works are to be carried out by the landlord or the tenant prior to occupation and completion of the lease. An important point for the tenant to note is that should they take occupation under an agreement for lease this may result in specific performance of the lease at which point the liability to stamp duty land tax arises at the point of occupation rather than on completion of the lease. This is important to note as penalties are imposed where the transaction is not notified to HM Revenue & Customs and any duty paid within the prescribed period.
Factors important to a tenant taking a new lease will include the flexibility with which they can alter, assign or sublet the premises, how frequently and on what terms the rent will be reviewed, what sort of access the landlord will be permitted, whether the tenant's repairing liability can be limited by reference to a schedule of condition, whether a new lease can be demanded at the end of the term of the initial lease to ensure the continuity of the business, the use to which the premises may be put, whether adequate rights to the flow of services or sufficient rights of access are granted etc. If the lease allows the landlord to ask the tenant to contribute to a service charge these provisions should be carefully reviewed to ensure they are equitable.
Other documentation which may be required by the landlord are perhaps a rent deposit deed governing the terms under which the deposit is held and a licence to alter if the landlord's consent is required to any alterations to be carried out by the tenant.
Preparing the Documentation Assignment of a Lease
Where an assignment of an existing lease is taken there is, of course, no new draft lease to negotiate. The incoming tenant will be expected to take the existing lease as it stands but on occasion it may be necessary to agree a variation to the lease where for example the new tenant wishes to use the premises for a purpose other than as provided for in the existing lease. This can be achieved fairly simply by entering into a deed of variation.
The transfer deed or deed of assignment (depending on whether the lease is registered at the Land Registry or not) will need to be negotiated as between the incoming and outgoing tenant's solicitors. These provisions are usually more technical than practical.
The landlord's consent to the assignment/transfer will usually come in the form of a Licence to Assign which will be drafted by the landlord's solicitor and approved by both the incoming and outgoing tenant's solicitors. This will also contain the incoming tenant's direct covenant with the landlord that they will comply with the terms of the lease to ensure a contractual relationship exists between the two.
It is usual for the landlord's surveyors' and legal costs to be paid by the outgoing tenant in order to secure the landlord's consent to the assignment. These will, of course, be in addition to the outgoing tenant's own solicitor's costs. The incoming tenant is usually responsible for their own costs incurred in the assignment transaction.
Our role is to amend the documentation produced by the landlord's solicitor to incorporate more ‘tenant friendly' provisions so as to ensure that the tenant's business is protected as effectively as possible.
The premises have to be used in the most advantageous way to maximise profits. The tenant will want to know if they can legally use the premises for the business in question and whether they can alter the premises to incorporate their fit-out before trading. Further issues of concern will be how easily they will be able to carry out further alterations or erect signage and whether they will have to obtain consent from the landlord which could prove expensive and potentially drawn out.
If the lease is too restrictive, this can not only cause problems for the existing tenant in terms of the day to day management of its business but it could also deter a prospective incoming tenant should the existing tenant wish to assign the lease or sub-let the premises.
Tenants will want to ensure that they can use the premises with as little intervention or interference from the landlord as possible. Access should only be enabled where the tenant is given reasonable prior notice of the landlord's intention to take access, save perhaps for where the tenant may be in breach of its obligations. If the landlord needs to comply with its repairing obligations at the premises, a tenant will not want the landlord to be able to enter the premises to carry our repairs at their busiest time of the year for example. Erecting scaffolding and deterring customers/clients from visiting premises could result in a loss of profits.
Today's market can be unpredictable. If the market takes a down turn the tenant will need the comfort of knowing that they can get out of the lease by exercising a right to break perhaps or by assigning or subletting the premises. These are areas where firm negotiation may be required. Conversely, if the business is thriving, the tenant will want the comfort of knowing that the landlord cannot just throw the tenant out at the end of the term.
The pressures of trading are stressful in today's diverse market. Starting a business or even maintaining a healthy profitable business is difficult. There are so many things to think about. We can help ease that pressure and negotiate a lease with practicality, understanding of the tenant's business and their particular requirements and a good knowledge of the local market.
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 must be obtained by the landlord's solicitor prior to completion.
On completion, the tenant will be required 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 paid.
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.
Following completion of the lease there will be stamp duty land tax and potentially land registration issues which must be dealt with. If the lease constitutes a notifiable transaction, a return must be filed with HM Revenue & Customs within 30 days of completion of the lease or the date there was specific performance of the lease with the tenant being in occupation under an agreement for lease perhaps. Certain leases are also required to be registered at the Land Registry on satisfaction of the stamp duty land tax requirements so as to be enforceable as against third parties in addition to the landlord.
The tenant may vacate the premises before the end of the contractual term as we have seen above by assigning the lease or subletting or by exercising a break provision perhaps.
In the event that the tenant does not or cannot adequately utilise any of these options, another option is available to it. It may be possible to negotiate terms of a surrender of the lease, back to the landlord. This may well be a fairly costly route for the tenant to take but it should, on surrender, release the tenant from any on-going liability under the terms of the lease.
By agreeing the surrender, the landlord will be releasing the tenant from its obligation to pay the rent for the remainder of the term and is therefore losing income flow which was expected for the duration of the lease. As such, the landlord will want to minimise the impact on his financial situation by seeking a contribution of, if not the whole, then part of the total sum due from the tenant for the length of the term. Further, as the landlord holds all the cards in this situation, they may try and use this negotiating strength to seek payment of their costs in connection with the surrender or indeed the cost of re-marketing the premises perhaps.
The lease will specify that the tenant must hand over the premises at the end of the term (yield up) in a condition commensurate with the provisions of the lease. To ensure the tenant has fully complied with its repairing obligations, the landlord is likely to have a schedule of dilapidations prepared which, much like a schedule of condition, records the state of repair of the premises but also details the breaches of the tenant's repairing liability by specifying the works required to bring the premises into a state of repair as required by the lease. The tenant may then try and negotiate with the landlord as to the repairs it deems necessary and their likely cost, for which the tenant will be responsible.
Where the tenant has carried out works during the term it may be required to re-instate those alterations on vacating, regardless of the cost to the tenant.
In the event the tenant decides to assign its lease, it is likely that where the lease was entered into after 1 January 1996, the landlord will require the outgoing tenant to guarantee the compliance by the incoming tenant with the provisions of the lease. This gives the landlord some come-back against the outgoing tenant in the event the new tenant fails to comply with its obligations be they financial or not. This guarantee could extend to requiring the previous tenant to take a lease of the premises from the landlord in the event the new tenant becomes insolvent for example. This guarantee is usually given by the outgoing tenant in what is referred to as an Authorised Guarantee Agreement (AGA), which is prepared by the landlord's solicitor and must be carefully negotiated on behalf of the outgoing tenant. In leases entered into prior to 1 January 1996, no formal AGA is required as common law provides that the landlord can pursue a previous tenant where the existing one is in default.