A lease is simply a contract between the building owner (‘Landlord’) and the occupier (‘Tenant’) which regulates that occupation of the building is for a limited period of time (‘Term’). Commercial leases are generally drafted by, and very much to the advantage, of landlords - meaning prospective tenants should take great care before entering into such leases.
Most commercial leases are of a particular type – a Full Repairing & Insuring lease (‘FRI’). This is the industry standard and Landlords want this type of lease because (a) tenants are responsible for all repairs for the duration of the lease and (b) tenants pay insurance and other costs connected with the property. The following is a summary of the main points in a standard FRI lease.
The length of time an FRI lease lasts will vary depending on the circumstances. A typical FRI lease will run for anywhere between a few months and 25 years. The average length of lease is probably now only around 10 years. Currently given the economic uncertainty Tenants would often also expect the right to end the lease after 3 or 5 years.
The Tenant will be responsible for the repair of the Property usually to a high standard and sometimes higher than the state of repair of the property at the start of the lease. For this reason, tenants should always try and negotiate restrictions to their repairs obligation, such as, to no better than its current standard.
If you lease part of a building or a building on an estate the Landlord will charge a service charge to recover the costs of maintaining and administering communal facilities. Once again, the service charge must be carefully negotiated and drafted to ensure that the tenants’ liabilities are appropriate for the property being leased.
Generally the landlords insure the property with the tenants repaying the premium to the landlords. Most landlords want to control insurance thus guaranteeing it does not lapse and they often receive a commission from the Insurer for placing the insurance which they keep.
Whilst the question of rent should be simple, there are a number of issues which may have to be considered; will VAT be added to the rent; is there to be a rent-free period granted to the tenants; is there to be a rent review? All of these issues require careful consideration.
Generally, landlords expect rent to be paid in advance generally on what are known as the usual quarter days 25 March, 24 June, 29 December and 25 December although the industry is now reverting to some degree to monthly rent payments. It is always paid in advance though.
This is often linked to the planning permission but sometimes the use is very specific, so as to ensure that landlords have a proper mix of businesses at the development and that there is no unreasonable competition between tenants.
Leases often restrict the tenants’ ability to deal with the lease i.e. to assign or sub-let. Landlords will seek to ensure that such arrangements can only be entered into with their consent and impose strict conditions on any prospective assignees.
Landlords often impose strict prohibitions on sub-letting and, once again, the conditions must be considered carefully to ensure that they are reasonable in all the circumstances.
Leases DO NOT automatically end on the termination date, unless valid notice has been given under the Landlord and Tenant Act 1954. If notice is not given the lease automatically continues until terminated in accordance with that Act.
In recent years, environmental issues have begun to impact on commercial leases, with a requirement on landlords to provide energy performance certificates to tenants and with the growing popularity of “green” leases.
The lease will be drawn to provide for the Landlord to have the right to recover the Property in the event that the Tenant is in breach of the Lease terms. Tenants can always apply to set aside such proceedings subject to making good all breaches of the Lease
The above is a brief summary of the main terms of commercial leases (and FRI leases, in particular). Leases are usually very large documents and each Lease needs careful consideration of the terms of such documents. If you need assistance on any Lease issues please Contact Us.