A commercial lease is an extremely important agreement that allows a business to occupy a certain premises for a defined period of time. This can be a shop, warehouse, office or any other physical building. It’s important however to understand the intricacies of renewing, terminating, or negotiating new terms. It may not be as straightforward as you first thought.
What is a commercial lease?
A commercial lease is a lease of a business premises (such as a warehouse, shop, office or salon). The lease can be over the whole, or part, of the site and will set out all of the terms and conditions for the occupation of the premises including the rent payable, the duration of the lease, who is responsible for maintaining the property, what rights the Tenant has to decorate and the process for any rent review or early termination.
A well drafted lease will minimise the chance of any conflict arising between the parties as their respective obligations will be clearly laid out together with the consequences of any failure to comply.
What are the options when businesses come to the end of their commercial lease?
Each lease will be granted for a set duration of time, known as a ‘term’ or the ‘contractual term’. The term might be for a matter of months or for a number of years. There are a few options available for the Landlord and Tenant at the end of a term, including renewing the lease if both parties want to continue the occupation or terminating the lease if this is not the case. These options are considered in more detail below.
Renewing your lease
A commercial lease can either be “contracted in” or “contracted out” of the Landlord and Tenant Act (LTA) 1954. If the lease is contracted out and it is the Tenant’s intention to remain in occupation of the property following the end of the term it is wise for them to approach the Landlord approximately 6 months before the end of the term to confirm this. It is common practice for the Landlord to start marketing the property for rent prior to the Tenant’s departure and therefore transparency at this stage will ensure that both parties are aware of the other’s intentions and can plan accordingly. Informing the Landlord at this stage will also ensure that the Tenant has ample notice if the Landlord does not wish to continue the tenancy for an additional term.
If the lease has not been contracted out, the Tenant is protected under the LTA 1954 and has security of tenure. Protected tenancies automatically continue at the end of the term (rather than terminate). A Tenant in a protected tenancy has a right to request for a new lease from the Landlord on substantially the same terms as their existing lease. Where a Landlord is not looking to renew the tenancy, the notice and grounds of the LTA 1954 must be complied with.
Negotiating new terms
If the lease has been contracted out and the parties are both agreeable to renewing the lease, it would be beneficial for them to agree between themselves the terms of the new lease. Even if both parties are happy to continue on the same terms as the existing lease, it is likely that some alterations will be required to a new lease, this may be to update the rental amounts or include a break clause (allowing for early termination). A surveyor can assist during negotiations and ensure that the parties understand the impact of any new terms. This is an ideal opportunity to iron out and clarify the position on any issues or uncertainties which may have arisen during the course of the existing lease.
If the lease is a protected tenancy a more formal process is required for the lease renewal. This process involves one party serving a notice on the other setting out their proposals for a new lease. The notice will provide a date by which the new lease is to be agreed, this date cannot fall before the end of the term. There are strict timeframes governing the service of the respective notices and if new terms cannot be agreed within the required period the parties can apply to the court to make the final decision. A Landlord can oppose the grant of a new lease when the tenancy is protected in very limited circumstances which is largely governed by the LTA 1954.
Terminating your contract
There are often unforeseen circumstances that may lead to a Tenant needing to terminate their lease before the end of the term. Some leases include a break clause which will allow the Tenant to exit early provided that they have complied with the terms of the break clause and given appropriate notice. If your lease does not contain a break clause there are other ways in which a Tenant can leave the lease early, this could be by way of an assignment or a surrender.
Provide notice to your Landlord
Your lease will ordinarily include a ‘Notice’ clause. This clause is important and it will set out the formal directions and time frames of how and when you should inform the Landlord of any important information. Your notice period will impact you if you wish to use your right to break the lease or if you would like to request a new lease at the end of the term. Notice periods are on average around the 6 month period but do vary from lease to lease so it is important you are aware of your notice period so you can properly prepare for this.
Review your commercial lease
When you review your lease it is important to pay particular attention to certain provisions as overlooking these provisions might prove detrimental to you further down the line. In particular you should consider if the lease has any rent review clauses, if so look at when the rent reviews will take place and how they will be calculated. Rent reviews can be calculated on an upwards only basis and, if this is the case, you should ensure you are prepared for any rent increase at the appropriate time. Break clauses should also be considered, these clauses will allow you (and in some instances the Landlord) to terminate the lease at set times within the term.
The break clauses can only be used if you follow the procedure set out within the lease, these procedures will often give time frames of when you can serve notice on the Landlord of your intention to exercise your break clause, familiarising yourself with any break dates and notice periods will ensure you are prepared should you want to exercise this in the future. Review your obligations and understand what rights you have to carry out any works and decoration to the property.
Conduct a property inspection
Prior to agreeing to enter into a new commercial lease it is prudent to inspect the business premises and, if appropriate, prepare a schedule of condition. A schedule of condition will be a series of detailed photos documenting the condition of the property prior to you taking occupation. You should request that the lease include reference to the schedule of condition to ensure that you will not be responsible for returning the property to the Landlord at the end of the lease term in a condition which is better than that when you originally started.
End of commercial lease checklist: What to do post-completion
Completing a lease is similar to a property purchase in that your ‘completion date’ is ordinarily the start of your lease term. As with a purchase transaction, once a lease has completed there are various exercises that need to be undertaken. Some of these exercises are as straightforward as familiarising yourself with the lease to fully understand your rights and responsibilities in relation to the property.
Pay Stamp Duty Land Tax (if applicable)
Stamp Duty Land Tax (SDLT) is payable on commercial leases the same way it is payable on commercial property purchases. Rental amounts together with premiums will be taken into consideration when calculating the SDLT. SDLT applications may still need to be submitted to HM Revenue and Customs (HMRC) even when there is no stamp duty due and stamp duty may still be due even if your lease is for a short period of time. SDLT applications need to be submitted to HMRC within 14 days of completion and failure to do this will result in penalties and interest being due. Penalties and interest will still occur even if there is no SDLT due. It is important that stamp duty is considered and dealt with as soon as possible following completion of your lease to ensure that you are not subject to any penalties or interest.
Register the lease with the land registry
Any lease that has a term of more than 7 years must be registered with HM Land Registry. Following registration you will be granted your own leasehold title number. The title register will confirm your leasehold interest in the land and the title plan will show the extent of the lease demise.
To register your leasehold interest HM Land Registry will require you to provide them with a completed copy of the lease, a certificate from HMRC confirming stamp duty has been paid (or an application has been submitted if no stamp duty is payable), the appropriate application form and the relevant fee. Additionally, if there are any restrictions noted on the Landlord’s title register, HM Land Registry will need to see evidence that the restriction has been complied with as part of the application process.
It is ordinarily a Tenant’s responsibility under the lease terms to register the lease and failure to do this will be a breach of the Tenant’s obligations. If the lease is not registered the Tenant will not have the security that comes with a registered lease and any future dealings, such as assignment, subletting or charging the property, may be delayed or impeded as a result.
Organise and complete any repair work
If a Tenant intends to carry out repair work on the property they should always check the lease for details of their obligations to carry out repairs first. A lease should have a very detailed description of what is included within the property demise, sometimes the demise may include things such as the roof and structures, and other times the lease may only include the internal demise of a property. If the lease is for the internal demise only, the responsibility for repair of the external parts of the building will likely fall on the Landlord and it will be your responsibility to inform the Landlord of the repair requirements rather than for you to undertake the repair work personally.
Arrange insurance cover for your new property
Property insurance will also be covered within the lease and the Tenant should ensure they are familiar with the insurance provisions and, in particular, who is responsible for insuring what within the lease. Multiple insurances can be referred to within the lease and different parties can be responsible for these numerous insurances. Who is responsible for what insurance will very much depend on the individual lease and even in leases where the Landlord is responsible for insuring the building the Tenant may still have obligations to insure their own fixtures, fittings and contents. Other insurances can include public liability and business interruption insurance.
It is important that both parties within the lease fully understand their insuring obligations. Failure to instruct the correct insurance can result in huge financial and legal consequences should an insurable event occur given that the appropriate protection is not in place.
Set up utility accounts and business rates for your new property
When first taking occupation under a new lease the Tenant should take steps to contact all of the relevant utility providers serving the property. Contacting the providers at an early stage and providing them with accurate meter readings will ensure that the Tenant does not fall behind with any utility payments and additionally that the providers will not charge the new Tenant for any utilities which are outstanding prior to the Tenants occupation. Additionally, registering with the Council for business rates as soon as possible will ensure that any demands will relate to the new period of occupation only.
Inform your staff and customers
Although this may seem obvious it is important not to overlook communication throughout your intended move, especially if entering into your new lease means you are vacating your current business premises and moving to another. A delay in informing your clients could result in loss of business if they unknowingly visit the old location, especially if the new premises is not close by.
Any proposed relocation should also trigger talks with your staff to enable them the opportunity to make alternate travel arrangements or have sufficient time to speak to you about any required change to their work patterns or agile working schedule.
Seek legal advice if needed
Entering into a new lease of a business premises is an exciting prospect but it is vitally important that appropriate advice is sought prior to signing on the dotted line. Leases can be confusing, not only due to their old terminology but also due to their sheer length. They are legally binding and the level of responsibility they impose upon a Tenant can be demanding. Seeking legal advice will ensure that your interests are protected and that you are fully aware of the obligations you are taking on.
How can Goughs help?
Goughs commercial property solicitors are experts in all areas of commercial leases whether it relates to drafting, negotiation, surrender, post completion or anything in between. We cut through the jargon to explain things in everyday language to ensure that you are comfortable in your understanding of next steps and general processes. We believe that communication is key and our friendly, responsive team will always be at hand to help you every step of the way.
