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Key Considerations for Tenants before signing a Commercial Lease

When agreeing terms of a Commercial Lease with your Landlord, some matters such as rent, the extent of the property being let and the term of the lease are ordinarily addressed, however often other equally important terms are not addressed in the level of detail they should be.

Below is a note of key matters tenants should also give consideration to, ideally before terms are agreed with the landlord and certainly before the lease is signed. The list is not exhaustive.

 

1.     Stamp Duty Land Tax:

A grant of a lease may trigger the payment of SDLT. This will depend on the length of the, the amount of the rent or premium. The amount of SDLT can increase if VAT is payable on the rent. HMRC will calculate SDLT on the amount of rent including VAT. This may be additional expense which a tenant has not factored in.

 

2.     Planning Use

The lease may authorise that the use of the Property but this does not mean that the Property has the correct planning use. Tenants are advised to investigate whether the property has the planning use that they need it to have to operate their business. If it does not, the tenant will need to agree with the landlord that it can apply for planning to change the use and an agreement for lease should be entered into. The agreement for lease would be conditional on planning so that if planning is not granted the tenant is not compelled to enter into the lease. Tenants are advised not to enter into leases until the planning use is clear.  Having an incorrect planning use can lead to enforcement action being taken by the local authority thus preventing a tenant’s desired use of a Property yet a liability to pay rent.

 

3.     Repair

Leases are often drafted on a “full repairing basis”. This means the landlord can ask you to return the Property in a better state than it was in at the time of the grant of the lease. You and your surveyor should inspect the Property to ascertain the state and condition of the Property and where the Property is in an inadequate state of repair, a schedule of condition recording the state of repair should be included in the lease. This will limit your repairing obligation and thus you will not have to return the property in any better state than evidenced by the schedule of condition. Landlord’s will try and resist this point but where required it should not be conceded.

 

4.     Rent Review

Where there is an open market rent review clause in the Property, rent will be reviewed on the various assumptions and disregards which should be reviewed by your surveyor.  Improvement works that you carry out should be disregarded on rent review as the landlord should not benefit from an increased rent due to your expenditure. Furthermore any alterations should also be disregarded. The assumptions and disregards should be drafted on the basis that they are fair to the Property they refer to.

 

5.     Break clauses.

Break clauses allow you to terminate a lease at a certain time during the term provided you have given notice as required by the Landlord. Break clauses often come with tight restrictions so you must ensure that at the Break date you are able to comply with those restrictions. For example, the requirement to deliver with vacant possession is extremely difficult to comply with. There is extensive commentary and case law surrounding this.  It is essential that a break clause contains a requirement for the landlord to refund any overpayment of rent from the Break Date to the next Rent payment date to ensure you are not out of pocket.

Our advice to any potential tenant is to give a great deal of consideration to terms of the lease and matters highlighted above before entering into the lease. We at Brethertons LLP have a wide range of experience in dealing with landlord and tenant matters and would be happy to assist. A lease is a liability which will run for a number of years so it is important that the terms are acceptable and correct for all parties.

If you have any questions regarding Commercial Property law, contact our Commercial Team today! If you have any other queries, please do not hesitate to contact any of our offices: BanburyBicesterRugby and London

You can contact us directly on 01295 270999.

 

Please treat the contents of our blogs as general guidance only. Please do not take any action based on their contents unless you have sought specific legal advice. Brethertons cannot accept responsibility for any errors or inaccuracies, loss or damage in circumstances where there is no formal retainer between us and we have not given you personal and specific advice relating to a matter for which you have given us full background details.  You must also bear in mind that the contents of our blogs are based on English Law, and because they contain archival material, that material is likely to go out of date. Therefore, it is important to consider the date that the blog was posted. Please also remember that the law may differ in different Jurisdictions.