Commercial Property

In short – to prevent you from being left in a precarious position

It is not a legal requirement to instruct a solicitor when entering into a commercial lease but is highly recommended!

There are many aspects to commercial leases that require legal expertise such as delineating the exact boundary of the land, as well as rent review provisions, repair obligations, break conditions and security of tenure to name a few.

Heads of Terms is a document which sets out the terms of a commercial transaction agreed in principle between parties during the course of negotiations. For example, heads of terms for a new lease may include the annual rent, a rent-free period, the term of the lease, a break clause, rent review provisions etc.

Service charge is payable by the tenant where the landlord provides services to the premises, e.g. if there are common parts which the landlord is responsible for cleaning, decorating etc. It is usual for the lease to provide for the tenant to contribute a “fair and reasonable proportion” towards the service charge, but some leases may specify a percentage. Service charge contributions are often calculated by reference to the size of the premises (in sq ft).

Rent review provisions are used to enable the parties to adjust the rental value of a property during the lease term.

The most common way to terminate a lease is to ensure that a break clause provision has been inserted.

The landlord may be able to forfeit the lease if they have sufficient evidence that the tenant has breached the terms of their tenancy agreement.

The lease will specify the “permitted use” and provide for the tenant not to use the premises for any other purpose than the permitted use. Some leases may allow the tenant to use the property for another purpose, but any change of use may require landlord’s consent. A commercial lease may also only permit the tenant use the property within certain trading hours, e.g. if the premises is in a shopping centre.

It is usual for the landlord to insure the premises and recover the cost from the tenant by way of an insurance rent.  The landlord will also insure against any loss of rent from the property, usually for 3 years.  The landlord will not usually insure any glass in the shopfront of the property, or any fixtures that are installed by the tenant.  The tenant will also need to obtain their own contents insurance.

If the landlord has “opted to tax” the property, the tenant must pay VAT in respect of all taxable supplies made to it in connection with the lease.

It is important to check whether the consent of the landlord is required before making such changes. It may be that a separate Licence for Alterations will be required, or the lease may need to be varied to alter the permitted use.

The provisions of the lease will be clear as to what alterations the tenant is permitted to make and whether the landlord’s consent is required for such alterations. Any alterations that require the landlord’s consent can be documented in a Licence for Alterations, which can provide for the tenant to reinstate the property at the end of the lease term.

The main costs involved in taking a new commercial lease include the following:

• Legal fees;
• Property searches;
• The costs of Land Registry documentation;
• Any stamp duty land tax (SDLT) payable;
• Land Registry registration fees.

We expect to progress matters to exchange of contracts and completion within 4 to 6 weeks of the issue of a draft lease with supporting documents.

These timeframes are our best estimates only as there are many aspects of this matter over which we have little or no control.

A break clause can allow either party to terminate the lease prior to the end of the contractual term.  It is usual for the lease to specify how much notice is required to be given and in the case of a tenant-only break option, the landlord can make the break conditional upon:

• All sums due under the lease being paid and up to date;
• The tenant vacating the property and returning it free from any occupier or third party right to occupation or possession;
• There being no subsisting material breach of any of the tenant covenants of the lease; or
• The tenant paying a premium to the landlord.

The lease will specify the tenant’s repairing obligations. If the lease is of the whole of the property, it is usual for the tenant to be responsible for the repair and maintenance of both the internal and external parts of the property. If the lease is of part of a building, the tenant may be responsible for repair and maintenance of the internal parts only, with the landlord maintaining the responsibility for repair and maintenance of the  external/structural parts of the building (although the landlord may be able to claim such costs back from the tenant via any service charge mechanism).

A leaseback is where the owner of a property sells their property to a purchaser but then takes a lease of the property from the purchaser so that they can still occupy the property. This may be done by a company so that they can obtain the cash from the property sale.

Yes – we have a Property Litigation team who can provide assistance with all commercial property disputes.

Please contact us or visit our Commercial Property pricing information page here.

A tenant can seek to limit their repairing obligations by requesting that a photographic Schedule of Condition is annexed to the lease. The Schedule of Condition will evidence the state and condition of the property at the time the lease is entered into, and the tenant will not be required to put the property into any better state of repair or condition than it was in at the date of the lease. If the repairing obligations are not limited by the lease, the tenant will be responsible for items of disrepair which were present at the date of the lease.

The steps are dependent on whether our client is the Landlord or Tenant.

If we are acting for the Landlord, the steps are as follows:

1. You must instruct a solicitor and have agreed heads of terms with the Tenant
2. Our team will review the title to the property and prepare the draft lease for submission to the Tenant’s solicitor, with the title pack
3. Reply to all pre-contract enquiries
4. Negotiations and agreement for the lease
5. Reply to requisitions on title and agree the completion statement
6. If the lease is to exclude Sections 24-28 of the Landlord & Tenant Act 1954, the next step is to prepare and serve on the Tenant the statutory ‘warning’ notice, and prepare the statutory declaration for the Tenant to sign
7. If there is a subsisting mortgage, then the next step is to apply for the Lender’s consent to lease
8. Arrangement for engrossments of the lease to be prepared and executed
9. Lease completion.

If we are acting for the Tenant, the steps are as follows:

1. Discuss with you the constituent parts of the property, your objectives for the transaction, and the timescale 
2. Review the draft Lease received from the Landlord’s solicitor 
3. Review the title to the Property, including all title documents 
4. Submit and review appropriate searches against the property, including Local Authority, Environmental, Chancel Check, and Drainage and Water 
5. Raise pre-contract enquiries with the Landlord’s solicitor 
6. Negotiate and agree the form of Lease with the Landlord’s solicitor 
7. Report to you on the terms of the Lease and the title to the property 
8. Raise requisitions on title, agree the completion statement and complete 
9. If appropriate, prepare the Stamp Duty Land Tax return for you to check, file it with HMRC after completion and pay the duty from the funds received from you to complete the transaction 
10. If appropriate, register the Lease at the Land Registry and report completion of registration to you.

Due diligence needs to be carried out on a property, even if it is a short commercial lease, to ensure that you have full knowledge of the property so that any risks can be minimised and you are able to make an informed decision about whether you would like to take a lease of the property.

It is important to ensure that you are able to use the property for your proposed use as otherwise you could be tied into a lease and paying the sums due under the lease for a property that cannot be used.

A lease also places a number of obligations on a tenant and therefore a tenant needs to ensure that these are not going to be onerous obligations because of the condition of the property.

SDLT may be payable dependent on the premium paid for the lease and the "Net Present Value” (NPV) of the lease. The NPV is based on the rent due under the lease and if the lease is longer than 5 years, the highest level of rent paid during the first 5 years will be used for calculating the NPV.

SDLT is payable on a purchase price of the lease (the lease premium) and the value of the annual rent that you pay (the net present value NPV) which are calculated separately and then added together.

If a lease is granted with a term of over 7 years, it must be registered with HM Land Registry.

Failure to register a lease can leave tenants in a vulnerable position because should ownership of the landlord’s interest change hands, the new owners may not be compelled to uphold existing unregistered leases.

Commercial leases are long, but not necessarily complicated. The reason they are long is because they need to outline all of the responsibilities of both the tenant and the landlord throughout the lease term. The lease should cover all scenarios that may arise during the term.  The lease will deal with insurance, provisions for repair, and alienation (i.e. on what basis the tenant can assign or underlet the property), and alterations. The lease will also detail any rights granted to the tenant and any rights reserved to the landlord, and will also outline the mechanism for any rent review.

Paying a premium of the property does not negate the need to comply with the commercial lease covenants. Commercial lease covenants should be adhered too.