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Renting a business property - obligations on a commercial tenant

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A lease or tenancy is an "estate in land" and is a legal agreement between you and the landlord allowing you to use the premises, subject to pre-agreed conditions. It can be granted for a set period of time (term of years or fixed term) or for a specific period (yearly, monthly, weekly or daily).

If it runs for more than three years, a tenancy must be in writing but a tenancy can be created by the conduct of the parties: it comes into existence legally when a person is given exclusive possession of land or property (e.g., if they are given the keys) and the owner accepts rent payments.

Tenant’s obligations

There are some obvious obligations which a business tenant will always have to abide by – such as paying the rent at the agreed time and to the agreed extent and not using the premises for illegal purposes – but how onerous the terms of your lease are, and your obligations under it, is basically up to you to sort out before you sign it.

The landlord will do his/ her best to get the best rent and most favourable terms possible, and you may need to negotiate to, for example, get the rent down as much as possible and ensure the terms more weighted in your favour. You also need to check the lease thoroughly for any particularly onerous duties on your part and have the premises checked over for any defects.

Here are some of the terms and conditions that a lease will usually outline, placing obligations on both you and the landlord, together with some issues to consider before you agree to them:

  • The rent payable for the space leased. You need to sort out how much this will be when you first take out the lease and how it is likely to change. Establish how often the rent will be reviewed and whether this will be an upwards only rent review or whether it can also be reduced according to market conditions.
  • The land or property which you will occupy. This should ideally accompanied by a detailed description and/ or a plan.
  • The length of the lease and any break clauses which will allow you to end the lease without penalty at certain points during the term of the lease.
  • Responsibility for insuring the premises – could include buildings and contents insurance as well as insurance to cover you for occupier’s liability.
  • Responsibility for making any repairs to the property (see below).
  • How you can get out of your lease – whether you are allowed to transfer the property to someone else or sub-lease it and if so, under what circumstances.
  • Service charges – on top of the rent, the landlord may charge more for services such as cleaning, heating and lighting. It may be cheaper if you are allowed to source and pay for these yourself.
  • Guarantees – the landlord may ask you for a financial guarantee or ask you to provide a guarantee for anyone who takes over your lease.
  • Lease end protection – this will outline your rights to renew the lease when it comes to an end. Retaining the same premises and consequent goodwill is particularly important to some businesses, such as shops or restaurants, so although you have some statutory protection in this area, you’ll want it spelt out in the lease too.

Repairing obligations

A common commercial property lease is the full insuring & repairing lease. This is typically for a term of say 25 years, with break clauses (in case you want to end the tenancy) and with periodic rent reviews (usually every five years).

With this type of lease you would be responsible for all insurance cover to do with the property as well as putting right any disrepair existing at the start of the term.

It is possible to negotiate a reduction in your repairing liability so that you do not have to improve the property beyond its condition at the date when you took out your lease.

To do this you’ll need evidence of this existing state of repair and a “schedule of condition” is drawn up, either by you and the landlord agreeing a description of any existing defects, backed up by photos, or by a professional surveyor.

You probably wouldn’t want to sign up to this sort of tenancy without having a survey carried out to ensure it is fit for purpose with no hidden defects which you might end up being responsible for repairing.

A landlord can serve a ‘schedule of dilapidations’ requiring you to repair the property at any time – including after you leave. He/she also has the right to charge you for loss of rent during the time the repairs are being carried out. He/she can also recover the costs of drawing up a schedule of dilapidations if the lease allows them to. It is therefore a good idea to agree the state and condition of the commercial property with your landlord before you vacate the property. 

Other obligations

A commercial lease will usually require you to honour any obligations to do with a property required by statute. These include:

  • health and safety requirements
  • fire safety requirements
  • environmental and asbestos requirements
  • Disability Discrimination Act requirements

Authorised guarantee agreements

For leases granted since January 1996, a tenant is automatically released from his obligations when selling the lease. There is a caveat to this though: many landlords will demand that you, as the outgoing tenant, will guarantee the incoming tenant’s performance of the lease terms before they will agree to the sale. These are known as authorised guarantee agreements.

Getting legal advice

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