The majority of businesses need premises to operate from, whether they be for offices, workshops, factories or storage facilities.
PLEASE NOTE: FOR CORONAVIRUS SPECIFIC GUIDANCE WE HAVE PRODUCED THE FOLLOWING BLOGS IN REGARDS TO COMMERCIAL LEASES/LANDLORD & TENANT ISSUES:
The Coronavirus Bill – what it means for landlords and tenants
Coronavirus – Do my obligations under a commercial lease still stand?
While some businesses own the premises they operate from, most occupy under a lease paying a market rent. But, there is more to a commercial lease than the payment of rent and the answers to the following commonly asked questions will give potential business tenants some useful guidance:-
1. Once I have signed the lease can I get out of it if my business suffers a downturn?
Leases are generally granted for a fixed period of years known as a term. The lease term can only be ended early by the tenant if, prior to entering the lease the landlord has agreed that the tenant has an option to do so, or, the landlord later agrees to release the tenant from the lease before the term has expired. If neither of these situations arise, and you cannot find an acceptable replacement tenant for the premises, you may well remain bound to pay the rent and comply with all other obligations until the end of the lease term, even if you have vacated the premises.
2. I know there will be rent to pay, but are there any other costs I may be responsible for under the lease?
If you are renting part of the landlord’s building such as an office block, you may also have a responsibility to contribute to the upkeep and maintenance of common parts of the whole building such as the roof and structural walls, or other things that are used in common with other occupiers of the landlord’s property, such as lifts or a reception area. This is often referred to as service charge. The tenant will also be responsible for the payment of the insurance premium for the premises to cover damage to the premises and also the loss of rent the landlord may suffer if the premises become unusable due to such damage.
There can be a cost if you want to transfer the lease, or sub-let part of the property to someone else, as you will usually need the landlord’s written permission, and the landlord can normally claim the cost of considering whether to agree to the transaction and also drafting and agreeing the form of the written permission. Finally, you will usually be responsible for the business rates, utilities and any other outgoings in relation to the premises.
3. If I find that there are repairs required to the premies, am I right to think the landlord will sort them out?
Most commercial landlords not only seek to avoid any responsibility to carry out repairs to the premises, but will actually seek to put the responsibility for putting the property into repair on the tenant’s shoulders. A tenant who agrees to a full repairing obligation can find himself with a repairing bill running into tens of thousands of pounds when the lease ends, despite the fact that the disrepair pre-dated the lease itself. A well advised tenant will try to limit his repairing responsibility to keeping it in no worse state than it was at the date of the lease. For this reason, it is highly recommended that an ingoing tenant obtains a survey to check and record the condition of the premises before they enter into a lease.
4. What happens if, after I have taken the lease, I discover there are problems relating to the premises that impact on my business?
The principle of “buyer beware” relates to a tenant taking a lease in the same way that it does to a purchaser buying a property, meaning that a tenant takes a property “warts and all” and they must satisfy themselves that it is suitable both physically and legally for the use they intend. The research into the property carried out by a good lawyer will reveal many things about the property, including whether the landlord actually has the power to grant the lease, any adverse rights that may affect it as well as any rights that benefit the property such as rights of way. Lawyers can carry out a range of enquiries and searches to discover such things as planning permissions affecting the land, whether the property is connected to the public highway, whether there is any risk that the premises may be on contaminated land, whether there is a risk of subsidence due to historic mining in the area, whether the property is connected to mains utilities and a host of other information.
It is common for tenants who have not been represented by solicitors to enter a lease without finding out any of this information. If a problem rears its head in such a case, say for instance the property does not have planning permission to use it for the tenant’s business, he will have no comeback against the landlord and the tenant will have to continue paying the rent despite the fact he may have a useless asset.
5. I’ve heard that a landlord can change the locks of my business premises if I am late paying the rent, is this true?
In short, yes. The powers of a commercial landlord to deal with non-payment of rent are far-reaching. Forfeiture is the procedure by which a landlord can terminate a lease and virtually all commercial leases will have a clause allowing the landlord to terminate the lease if the rent is unpaid for a specified number of days, usually somewhere between 14 -28. Unlike their residential brethren, commercial landlords do not need a court order to retake possession of leased property if their right to forfeit the lease has arisen because of late payment of rent. Landlords also have the right to send bailiffs in to seize the tenant’s goods and sell them if the rent is unpaid, but legislation will soon come into force to restrict this right.
The above answers cover some basic issues relating to commercial leases, but in reality only scratch the surface of what is a complicated topic. If you have any queries relating to commercial leases please comment on this article and I will try and answer them. I will also be posting further blogs on different aspects of commercial leases and commercial property in general and welcome and comments and contributions you may have.
Hi Stuart
In the comments above I have referred to the Landlord and Tenant Act 1954 (the Act) and this is central to your situation. As you are occupying the property for a business, and if the original lease was for over 12 months then you will have the protection of the Act unless steps were taken to exclude it by the contracting out procedure. This would have involved you signing a decelaration confirming you agreed to waive the protection of the Act.
If you have not contracted out of the Act then your lease will continue on until the landlord serves a notice under section 25 of the Act and this notice must be at least 6 months. When this notice is served you are entitled to apply for a new tenancy on terms which are either to be agreed or decided by the court.
If the property is sold the new owner could object to a new tenancy but only on limited grounds. For a landlord to object on the ground that they want to use it for their own business, there is a condition that they must have owned the property for 5 years previously which the new landlord will not be able to satisfy.
Another ground the landlord could use is that they want to carry out a substantial redevelopment of the property, but this has to be more than a mere facelift for the property. The other grounds either require some default on the tenant’s part, or an offer by the landlord of reasonably suitable alternative accommodation.
Therefore, if your tenancy is protected by the Act, and you have not defaulted on the terms of the tenancy, you should be fairly secure.
John
I have a lease due to expire in 1 month. I have verbally agreed with the landlord that we will continue on a month-to-month basis with a notice period of 3 months from me and 6 months from my landlord. In this climate neither of us wish to be tied into a long fixed lease.
In the background there is an interested purchaser of the freehold who would like the premises for a similar business. We have discussed selling my business goodwill as a seperate entity and I have agreed this would be possible.
My concern is that they could just wait for the lease to expire, purchase the freehold and as my new landlord take possesion for themselves and negate having to purchase the business goodwill. Leaving me high and dry!
Are there any safeguards against this?
James
The fact that the contracting out procedure was not followed properly does not affect the validity of the lease if it was properly signed and completed. If you have signed the lease and it has been dated and completed by the landlord the lease will be binding, save for the contracting out clause which is only effective if the contracting out procedure has been adhered to.
The 1954 Act contracting out procedure requires that the tenant gives a written declaration prior to entering into the lease, whether or not it is a renewal. Where the declaration is given 14 days or more before entering into the lease, a simple written declaraion is given. If the declaration is given less than 14 days before the lease is entered into, then a statutory declaration made before a solicitor is required.
As you have not given the declaration, then there will be a binding lease but it will have the protection of the Act, which means you will have a right to renewal at the end of the term.
I hope this clarifies the position.
John
Hi Anne
Due to the economic climate, your situation will be an ever more common problem. Where a guarantee is given for the rent due from a tenant there are statutory procedures which a landlord must follow if the lease was entered into after 1995.
Section 17 of the Landlord and Tenant (Covenants) Act 1995 provides that the landlord can only obtain payment from a guarantor if they have first made a written request to the guarantor for payment. This request must comply with the provisions of the above section and importantly must be made within 6 months of the rent installment falling due. Once the request has been properly made then the guarantor will have to make payment, and could be pursued through the courts if they fail to pay.
The best thing to do for the time being is to keep your head down. There is a chance that the landlord will fail to give you notice within the 6 month period, and you will then avoid liability for that specific payment.
John
Hello,
Stumbled across this site and the previous answer which is similar to my situation. I signed a lease which was supposed to be contracted out of the 1954 act. The lease explicitly mentions this. However, I did not sign the contracted out “Health warning” or whatever it is called because I believed I was already covered by the act. Regardless of the latter, I signed the lease but as I said did not sign the contracting out health warning. Where does that leave the lease and what rights do tenant and landlord have? Surprisingly the landlord did not persue for signing of the contracting out notice. They gave me the 14 days warning etc. buit when I did not sign it I heard no more from them.
Thanks
James
we have just sold a leasehold hotel and unfortunately had to sign a rent guarantor for the buyers. they are having problems paying their next quarters rent due on 1st march.What are the procedures now and what are the time scales before they contact us?
Hi John,
Thanks for that very detailed reply. The new tenancy was to be exluded from the law as well – but I never signed that exclusion either. The landlord is not a happy camper at the moment.
Best
Ray
Ray
I fully endorse your first sentence, this is a complicated one. However, I can give you some principles that will hopefully help.
The Landlord and Tenant Act 1954 (the Act)includes, amongst other things, provisions which allow for the continuation of a business tenancy even after the agreed term has ended, and also gives a business tenant the right to renew thier tenancy. In order to exclude the Act there is a procedure which involves the tenant giving a declaration that they undertsand the Act will not apply. It appears, that in relation to your first tenancy, this is what you have done.
Where the Act does not apply, the lease comes to an end on the last day of the term stated in lease. Where a tenant remains in occupation after the term is expired and continues to pay rent, a number of different scenarios can arise.
The first and most common is where the parties are negotiating the terms of a new lease, and for the time being do not intend to bind themselves to any other arrangment than a temporary continuation while negotiations continue. This is known as a tenancy at will and either landlord or tenant can terminate it at any time.
The second case is where the parties do nothing at all and the rent is continually paid and accepted. In this case a court can find that a periodic tenancy has arisen, which is based on the periodic payments of rent coupled with the exclusive occupation of the property by the tenant. A periodic tenany cannot be excluded from the Act, and will therefore, create rights for the tenant that they did not have under the orignal tenancy. Where the original tenancy was excluded from the Act, the courts are reluctant to find that a periodic tenancy has arisen, for the above reason.
The third scenario is where the parties have entered into a binding agreement for a new tenancy. The general rule is that an binding agreement for a lease for 3 years or less does not need to be in writing. However if the parties intend that the Act be excluded, the tenant must sign the relevant declaration before entering into the contract and the contract must contain a written provision excluding the Act.
Therefore, a key factor in your case will be whether or not the new tenancy was also to be excluded from the Act.
This is a complicated area of law, and I have outlined some basic principles that apply. If you would like us to provide some detailed advice specific to your problem, please do not hesitate to get in touch.
John
Hi,
Have a complicated one! I had a lease which expired. This was in the name of my limited company, but I also signed as a personal guarantor. Under this lease I signed the exclusion to the tennant act etc. This lease expired over a year ago and I negotiated a new 3 year lease, taking me personally off the lease, and only in the name of the limited company. However, this lease was never correctly executed as I forgot to sign it and it was returned to me to sign which I never did. I now find myself in position where I can’t continue running the company do to a substantial business downturn, adn I haven’t paid rent for the last two months. I am avoiding liquidation by paying everyone but the landlord is trying to hold me to the new three year lease, two years of which are remaining. Can I argue that as the new lease was never executed that the old lease still applies and I am on a month to month tenancy?
Thanks Ray
thanks very much for the advice,this is a great site,
thanks again
sue