Contributed By Hawkins Hatton Corporate Lawyers Ltd
The law recognises the following arrangements which allow a person, company or other organisation to occupy and use real estate for a limited period of time without buying it outright:
There are no specific different types of commercial leases. The nature of any lease, in terms of its duration, is a matter of negotiation and agreement between the parties.
The Code for Leasing Business Premises in England and Wales 2007 is intended to provide a voluntary code of practice to govern the negotiation of leases between landlords and tenants.
There is no typical length of a lease.
Generally a tenant will covenant to maintain and repair the property in a long lease. A tenant will limit its liability by recording the state of repair of the property as at the commencement of the lease with a schedule of condition.
It is usual for lease rents to be paid on the usual quarterly days, namely 25 March, 24 June, 29 September and 25 December.
The rent payable under a lease will remain the same for the duration of the lease term unless there is a rent review clause.
New rent under an existing lease will be determined in accordance with the rent review clause, if such a clause exists. It is usual for the rent review clause to be ‘upwards only’. The revised rent will be the greater of the rent payable at the time of the rent review and the market rent determined by a surveyor.
Less common rent review clauses provide that the rent will be reviewed in line with inflation.
VAT is only payable on rent at the current rate of 20% if the landlord has opted to tax the property.
A deposit may be payable under a rent deposit deed at the start of a lease. In addition, a tenant will be responsible for registration of a lease (if it is for more than seven years), as well as payment of the modest registration fee. SDLT is also payable for a commercial lease as detailed in 2.10 Taxes Applicable to a Transaction, above. Subject to negotiation insurance rent and service charge may also be payable at the outset.
The landlord is responsible for the maintenance and repair of the common areas used by tenants. The landlord will usually undertake to provide these services on the estate and recoup the cost from tenants via a service charge.
A tenant will be responsible for the utilities consumed by it and these will be apportioned according to the space occupied by the tenant unless the supply is segregated.
The landlord will usually insure the property and pass this cost on to the tenant.
The typical risks insured against include:
The tenant is under an obligation to use the property in accordance with the legal permitted use (ie, within use classes B1, B2 and B8 of the Town and Country Planning (Use Classes) 1987). In addition, a lease will usually specify that a tenant cannot use the property for any illegal or immoral purpose. Further restrictions on use can be agreed as part of the lease negotiations. A landlord is also able to restrict the use of the property by agreement with the tenant. For example, if one tenant on an estate has entered into an exclusivity agreement for a specific type of use of a property (eg, an Indian restaurant) then the landlord will be able to restrict the use of other properties on the estate for use within this area to enable the exclusivity agreement to be complied with.
A lease will prohibit the tenant from undertaking any external or internal structural works to the property without a landlord’s consent. Even internal, non-structural alterations to the property usually require the landlord’s consent in the form of a licence to alter.
One of the key statutory regulations which applies to commercial leases is the Landlord and Tenant Act 1954. This legislation provides business tenants with security of tenure unless the statutory provisions are formally contacted out.
As for residential leases and agricultural tenancies, these have an abundance of statutory regulation on which specific advice should always be sought.
A lease usually provides that the landlord can end the lease (forfeit) and regain the property in the event the tenant becomes insolvent. In the event a tenant goes into administration, the moratorium imposed would mean that any forfeiture action is placed on hold.
If a landlord is concerned about a tenant's ability to meet its obligations under a lease, it can require a rent deposit for particular rental payments. This usually comprises the payment of up to three months' rent up-front, which can be used in the event of default. The landlord can also insist on a personal guarantor.
A business tenant is able to remain in occupation after the expiry of the term of a lease if the lease is not contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954.
If the lease is protected then the landlord is only able to bring the lease to an end on the expiry date by providing the tenant with formal notice (of not less than six months and not more than 12 months) that one of the following are applicable to the property:
The landlord is typically able to forfeit the lease if one of the following events occurs:
Additionally both parties may have a contractual right to break the lease or negotiate a surrender of the lease.
A landlord can commence forfeiture proceedings to end the lease prior to the expiry date on grounds of the tenant’s default. How long the process would take is dependent upon various factors, including whether the tenant seeks relief from forfeiture.
It is possible that a lease could be terminated by any third party, eg, the government, if the public interest so required. Such a process would require the requisite public law requirements/criteria to be met.