Typically, commercial leases in England are short, lasting between 5 to 10 years, at a market rent and with an upwards only rent review. Unlike in France, the duration of the lease term is more flexible.
However, regardless of the length of the lease or the level of rent, the extent of the space rented or rights affecting the property, here are five essential clauses to consider:
Break Clause
- The parties can agree to allow one party to end the lease early. This clause can be mutual, but more often than not it is a tenant only break clause, and subject to conditions, such as payment of the annual rent and giving up occupation of the premises. A tenant would be well advised not to accept any conditions beyond these. Break clauses are high risk and must be negotiated with care.
Security of Tenure
- Unless security of tenure under the Landlord and Tenant Act 1954 is excluded (which is quite common and commonly referred to as a lease “outside of the Act”), or the landlord exercises their right to repossess the property (under certain conditions), a commercial tenant will be able to remain in the premises beyond the expiry of the lease term and offered a new lease on the same terms as their previous lease (except for financial terms, such as rent), for a similar contractual term. Most property owners will try to exclude security of tenure, but it’s negotiable. As an alternative, the parties could negotiate a contractual renewal option, which provides the security of a longer occupation with the flexibility of a short-term arrangement.
Repair
- A tenant is usually required to keep a property in good and substantial repair and condition. The extent of this obligation can vary significantly depending on how the relevant clauses are drafted and negotiated, and may not necessarily reflect the condition of the property at the beginning of the lease term: a tenant could therefore be required to put and keep a property a better state of repair and condition that it was in previously. In England, limiting a repairing liability to a schedule of condition (evidencing the state of repair and condition at the start of the lease) is not required by law. If such a schedule is appropriate because the property is in poor condition, it must be negotiated and agreed before the lease is granted.
Rent Review
- A lease will usually include a mechanism to increase the rent at some point during the term, either in line with inflation or for a rent obtainable on the open market; usually it is the latter and part of the assessment will rely on a definition of a hypothetical lease, along with certain assumptions and things to ignore on a review. Setting the terms of this hypothetical lease and defining the other conditions will require care to ensure they are balanced and in line with what is considered to be the market standard.
Assignment
- Most commercial leases allow the tenant to assign their lease to a third party and sublet all or part of the property, subject to certain conditions and the landlord’s prior consent, which cannot be unreasonably withheld or delayed. If a lease does not contain such provisions, the tenant will not be able to do this, unless the landlord allows them to, and will be unable to quit the premises (unless there is a break clause). Therefore, it is important for the lease to be flexible and contain such permissions and for the conditions to not be too onerous, such as a requirement for a personal guarantee from a director of the new tenant company or for a big rent deposit. A complete prohibition on subletting and/or assignment could also be highly unattractive to a future tenant or buyer of the tenant’s business.
When Negotiating the Terms of a New Lease
It is essential that both the landlord and the tenant are well-advised by a surveyor during lease negotiations.
A surveyor acting on behalf of the landlord has no legal obligation to offer terms that are fair or balanced. Therefore, it is recommended that the tenant appoints their own surveyor.
The points outlined above are neither final nor exhaustive. Negotiations between the landlord and tenant will depend on the nature and type of the property, the lease term, the tenant’s specific needs, the market and each party’s bargaining power.
A solicitor will then incorporate the agreed terms into a draft lease and further negotiate them on behalf of their client. It is essential not to view and negotiate each clause in isolation, but rather to consider the intentions of the parties, as well as the impact of the drafting, in order to achieve a contractual balance that is satisfactory to both parties.
