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Commercial Property Leases: 4 Key Tenant Considerations

Due to the high expense and upfront capital investment required to purchase a commercial property, many businesses prefer instead to become a Tenant under a Commercial Lease.

A Commercial Lease records the relationship between the property owner (the Landlord) and the occupier (the Tenant) and sets out the terms on which the Tenant may occupy the Landlord’s property.

However, it is imperative that the Tenant negotiates terms with which it will be able to comply.

We have therefore put together four key points that tenants should consider below.

  1. Rent Deposits and Guarantees

If the Tenant is a small limited company, the Landlord will often require it to provide a Rent Deposit or Personal Guarantee.

If the Landlord demands a Rent Deposit, it is important that the Tenant fully understands the conditions under which this will be held, the grounds on which the Landlord may take money from the Deposit, and the basis on which the Deposit will be returned.

If the Tenant is asked to give a Personal Guarantee, the individual stepping into that role should consider that (should the Tenant fail to comply with its obligations under the Lease) he/she will have to personally fulfil the Tenant’s obligations.

This means that the Guarantor’s personal assets and capital could be at risk.

  1. The Lease Term and Options to Break

The length of the Lease Term will always be a key negotiation point.

Generally speaking, shorter leases will incur higher rents because the Landlord’s income will only be secured for a shorter term. Conversely, longer leases may have slightly lower rents because the Landlord will have a guaranteed income for a longer period.

For the purpose of flexibility, the Landlord or the Tenant may wish to negotiate a Break Clause into the Lease, to allow one or both parties to break the Lease early.

A ‘Tenant Only Break Clause’ will generally require the Tenant to give at least six months’ notice of its intention to exercise the break, to have paid the rent up to date, and to have fulfilled all of its obligations under the terms of the Lease.

  1. The Lease and the Landlord and Tenant Act 1954

It’s important for tenants to consider if they want to benefit from the security of tenure protections granted by the Landlord and Tenant Act 1954.

The Act grants the Tenant the automatic right to renew the Lease at the end of the term, so long as the Landlord can’t evidence its requirement to repossess the property (for example for refurbishment).

The Landlord can require the Tenant to contract out of the protection offered by the Act, so that both parties know there won’t be a future automatic right for the Tenant to renew the Lease.

  1. Repairing Obligations

Many commercial landlords seek to avoid all responsibility for carrying out repairs to a property; some go further and insist that the Tenant puts the property in a good and substantial state of repair, regardless of the condition of the property at the start of the Lease Term.

If the Tenant agrees to a full repairing obligation, it may incur heavy expenses in repair bills, even if the disrepair pre-dated the start of the Lease.

The most efficient and reliable method of limiting the Tenant’s repairing obligation is to insist that the property need not be put into any better state of repair and condition than at the beginning of the Lease.

To do this, it’s strongly recommended that the Tenant carries out a survey of the property and prepares a photographic ‘Schedule of Condition’ to evidence that state and the Schedule should be annexed to the Lease.

For more information on drafting and negotiating the terms of a Lease, or for assistance, please contact our Property team today.

 

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Marcus Kaye

Associate Solicitor
Commercial Property
MKaye@LawBlacks.com
0113 322 2818
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Marcus Kaye Black Solicitors LLP