Leasing – What You Should Know

What is a Lease?

A lease is essentially a contract between the landlord and the tenant that gives the tenant the exclusive right to occupy and use the landlord’s property for a period of time.

Term

The lease is granted for a period of time, referred to as the “term”. Generally, a business lease is granted for a “fixed term”, that is a fixed period starting and ending on fixed dates.

It is important to be aware of when the fixed term will end, and whether it can be terminated earlier by either party. The right to terminate early is usually referred to as a “break right”.

Guarantor 

A guarantee is a promise given by one party (‘the guarantor’) that another party will meet its obligations. If the other party fails to meet its obligations, then the guarantor can be asked to meet the shortfall (if the payment of money is involved) or pay for the default to be rectified (or in the worst case be sued for damages).  In some cases, the guarantor may have to step into the shoes of the other party if, for example, it ceases to exist.

It is common when granting or agreeing to the assignment of a commercial lease for the Landlord to require the tenant to guarantee the tenant’s obligations under the lease.

Rent and Rent Review 

The lease may be granted for a substantial premium and a small, or nominal annual rent. Alternatively, the lease may have been granted without any initial premium, but for a more substantial rent.

The rent will generally be expressed to be an annual sum that has to be paid either quarterly payments of four instalments in advance or on a monthly basis. If the parties agree that the annual rent is to be paid quarterly, it is common for the lease to require the rent to be paid on the “usual quarter days”, which are 25 March, 24 June, 29 September and 25 December.

Service Charge (if applicable to the lease)

If the lease is of the whole of a building, the tenant is likely to be responsible for all the outgoings associated with the building. Where the lease is of a part of a building, it is generally easier for the landlord to pay the outgoings and then bill the tenant for the tenant’s share of those, this is known as a service charge.

Area Demised

The lease refers to the property that is given to the tenant as the “demise”. The extent of the demise is important because the tenant is only responsible for its demise.

A proposed tenant would not have to repair or redecorate any property outside its demise unless the lease specifically states otherwise (which would be rare).

A proposed tenant has no rights over the landlord’s property that is not within the tenant’s demise unless those rights are given in the lease (see Rights, exceptions and reservations).

A proposed tenant cannot make alterations or additions to its property that fall outside the demise (for example, an extension).

Rights, Exceptions and Reservations

The lease will usually grant the tenant rights over the property that is outside the tenant’s demise but still forms part of the landlord’s property.

The lease will also usually grant rights to the landlord over the property demised to the tenant. Traditionally, these rights granted to the landlord are referred to as reservations because the rights are reserved out of the grant of the demise to the tenant.

The lease will usually also exclude certain rights from the tenant. These are referred to as exceptions, and effectively limit the tenant’s rights.

Insurance

The insurance clause is to be reviewed carefully and in conjunction with each party’s repairing obligations.

It is important that one party is obliged to insure the property so that problems of double insurance and no insurance are avoided.

The insuring party must make a note of its obligations under the lease in terms of the level of cover, the risks covered and any other duties/obligations listed.

For further information on Insurance – please review the website [insert link].

Repairs

Usually, the repairing obligations will be on the tenant. There may also be repairing obligations on the landlord, subject to negotiation of the terms of the lease between the parties.

Dilapidations

Dilapidations generally refer to items of disrepair that are covered by specific terms known as ‘covenants’ contained in a lease. The term is often used, as shorthand for terminal dilapidations, to cover breaches of the tenant’s covenants relating to the physical state of the premises when the lease ends.

Alterations and Improvements

The lease may impose restrictions on what alterations and improvements the tenant can make. This is to protect the landlord from alterations that might damage the landlord’s investment interest in the property.

There will usually be a requirement to reinstate the property to its original configuration before the end of the term, however, this would depend on negotiations between the landlord and the tenant.

Assignment and Underletting

If the tenant wants to sell its interest in the lease, the sale is referred to as an “assignment”. If the tenant wants to keep its interest in the lease, but allow someone else to use the demised property or part of it, the tenant could grant an underlease (also known as a sublease).

Use

The lease will generally specify how the demised property may be used.

The restriction may be expressed positively or negatively, for example, see below:

”The tenant shall use the property for [the permitted use]”.

”The tenant shall not use the premises otherwise than for [the permitted use])”.

Contracting Out

If the lease is a “business lease” under the Landlord and Tenant Act 1954 (LTA 1954), the tenant has certain rights to renew the lease at the end of the contractual term (although there are exceptions to this and the right may be defeated by the landlord in certain circumstances).

The tenant may agree to forego these rights. If so, this has to be effectively authorised and recorded in the lease.

Code for Leasing Business Premises, England and Wales 2020

The Lease Code 2020 applies to lettings of premises in England and Wales to tenants who will carry on a trade or professional or other business activities in them.

There are mandatory requirements of the Lease Code 2020 which apply to landlords and agents who are regulated by RICS.

Rent Deposit Deed

A rent deposit deed where the deposit is held by the landlord but, subject to the terms of the deed, it remains the property of the tenant and is charged to the landlord.

Typically, a Rent Deposit Deed is a document which is supplemental to the Lease and a Landlord may require Rent Deposit so that they have an advance payment of the rent (usually between 3 and 12 months) to protect the Landlord in situations where the Tenant fails to pay rent or breaches other conditions/terms in the Lease.