COMMERCIAL LEASES – POINTS TO BEAR IN MIND

As lawyers, we often find that by the time we become involved in negotiations relating to a commercial lease, the main terms of the deal have already been agreed – often in the shape of Heads of Terms. Sometimes we feel that our client may have missed out on the opportunity to negotiate the best deal possible. What can appear to be technical “legal” terms can often mask important commercial issues.

Below we set out some of the points that you may to bear in mind when negotiating a commercial lease:

How long is the proposed term?

A landlord may be looking for security of rental income over a long period. On the other hand, he may have redevelopment plans and will only want to grant a short lease.

A tenant will probably want security for a reasonable period. However, he may also want to consider how the needs of his business will change in the foreseeable future, and will want to avoid being saddled with premises which are no longer right for his business.

Should the lease be contracted out from the Landlord and Tenant Act 1954? If the lease is not contracted out, at the end of the term the tenant will be entitled to apply to the court for a new tenancy. This will be granted unless the landlord can establish one of the statutory grounds of opposition – for example, that the tenant has persistently failed to pay the rent or the landlord intends to redevelop the premises. If the lease is contracted out, the landlord will be entitled to possession at the end of the term and (depending on market conditions) the tenant will probably be in a very weak bargaining position with regard to obtaining a new lease.

Should the lease contain a break clause entitling either or both parties to terminate the lease before the end of the term?

A landlord needs to bear in mind that if the lease is not contracted out of the 1954 Act, any right to break in his favour will have limited effect. If that right is exercised the tenant will be entitled to apply to the court for a new tenancy and the landlord will only obtain possession if he can establish one of the statutory grounds of opposition.

A tenant needs to be aware of the dangers of a right to break in his favour being made subject to overly stringent conditions – for example, that the tenant has fully complied with his obligations under the lease.

Is there to be a rent-free period? If so, is it to be limited to the basic rent payable under the lease, or should it also extend to the service charge payable under the lease?

How extensive should the tenant’s repairing / decorating obligations be? Particularly in the case of a short lease, a tenant will be reluctant to accept an obligation to undertake extensive repairing obligations. One possibility might be for the tenant’s obligations to be limited to the state of the premises as at the beginning of the lease, as evidenced by a Schedule of Condition attached to the lease.

Should there be a service charge cap? It may be worth considering the possibility of negotiating some kind of cap or limit to service charges. Exorbitant or unexpected service charge demands are a perennial concern of tenants. Similar issues can arise as arise in relation to the tenant’s repairing / decorating obligations. Typically with a multi-let building, the landlord will undertake to repair and decorate the structure and common parts of the building and seek to recover the costs of so doing from the tenant through the service charge. Many tenants will want to avoid funding or part-funding an expensive refurbishment.

Should sharing with group companies be permitted? The tenant may want to try to negotiate the right to share the premises with a company in the same group without having the hassle of obtaining the landlord’s prior consent. A landlord may well be prepared to grant such a right, so long as it is structured in such a way that any sharing group company does not acquire any legal premises.

If you would like to know more about the points to be borne in mind when negotiating a commercial lease, please contact Caroline Wilton.

Filed: 25/10/2007 16:20:35