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
CAN THE LANDLORD CHANGE THE LOCKS TO MY CAFE DESPITE THE FACT THAT THE AMOUNT OF RENT ARREARS CLAIMED WERE IN DISPUTE…ALSO I WAS ALLOWED TO TAKE ALL MY POSSESSIONS HOWEVER MANY ITEMS TOTALLING OVER £3,000 WERE MISSING/RETAINED/STOLEN…
WHAT CAN I DO?
THANKS IN ADVANCE FOR YOUR ADVICE
Hi Shaz
The insurance payout a landlord receives for unpaid rent is usually triggered by the damage or destruction of the building which prevents the tenant from occupying the building. Most leases state that if the property is not capabale of occupation by the tenant, the tenant does not have to pay rent. In order that the landlord does not lose out he insures for the loss of rent in this eventuality.
There is no insurance I am aware of which covers loss of rent purely by the tenant’s inability to pay as there would be too many instances were the policy would be triggered.
It looks as though you will have to try and find the rent. Sorry I can’t find a sollution for you.
Regards
John
Hello John
We took out a commercial lease for one year after which the lease continued for a number of months.
As a result of the financial downturn I was no longer able to continue paying the rent. I managed to negotiate a reduction in rent but despite this I was still not able to continue paying rent.
I did not pay rent for approximately three months afterwhich I agreed to vacate the premises and return the keys for the property to the landlord.
The landlord is now pursuing me for unpaid rent for the three month period.
During the period I was occupying the premises, as well as the rent I was also paying an insurance premium for an insurance policy which the landlord had taken out allowing him to claim for non payment of rent. Because I was paying the insurance premium for this policy, is the landlord still able to pursue me for the unpaid rent?
Hi Sharyn
Unfortunately, I am only qualified to advise on the law in England and Wales, and have no knowledge of the law in California, although I would definitely swap the weather, it is pouring with rain here in England (nothing new there).
I suggest you give a local lawyer a call, sorry I can’t help here.
Regards
John
Hello,
We signed a three year lease for $4,000 a month in the state of California. We are a year into our lease and have fallen into financial difficulties. We currently owe around $18,000 and have been negotiating to lower our rent. I have been telling the landlord we can only afford $2,000 per month. Of course, he makes us offers that are not close to the $2,000. We even asked to pay $2,000 per month for 3 months and then check our finances and go from there.
Although we keep telling him we can only afford $2,000 per month he is willing to go to $3,000.
We have begin to offer other services that will bring in great money, however; it will take around 3-4 months for it to kick in. We have told him of our other services so he knows the money will be coming in.
The landlord states if we do not accept his terms then he will serve us to pay the back money immediately. Of course, we do not have it.
If I send him $2,000 per month can he still kick us out? Also, we are an LLC-can he go after the partners and take our homes and such?
Mark
I am sorry to hear of the problems you are experiencing. Have you asked the landlord whether they would accept a surrender of the lease? You will have to pay the landlord a sum of money for this, but it will at least draw a line under your personal liability. The amount you would have to pay is a matter for negotiation. The landlord is under no obligation to accept a surrender.
If the landlord will not agree to a surrender of the lease you are liable for the rent and all the other tenant covenants until the term expires, or a replacement tenant is found. Given the state of the business, I think you should look at consulting an Insolvency Practioner to see whether the business can be saved. At present all it is doing is draining your personal resources. It may also be worthwhile asking them to look at your personal position, to see whether an Individual Voluntary Arrangement could be agreed. It is better to adress the situatuion now as opposed to waiting until creditors pursue you for your house and cars.
Regards
John
Hello John,
We have occupied a commercial property for the past 6 years. There is 4 years left of the 10 year lease that we signed, and
both myself and my wife signed as guarantors for the lease. We operate as a limited company.
We couldnt afford to pay the rent any more due to a lack of business, and subsequently phoned the managing agents after we
unsuccesfully tried to reassign the remaining 4 years through a local commercial estate agent.
When we spoke to the managing agents of the property, they asked if we could afford to pay half of the quarter due, which we
could and have. Since then, the next quarter is due to be paid at the end of September 2010, and we simply dont have enough
money to pay it. I have since spoken with the landlords solicitor and he told me to stop marketing the property myself, and
they would market the property themselves because, in his words “noone would be interested in the remaining 4 years of a 10
year lease”.
The landlords have now instructed a different commercial property agent to market the property and they have erected a to let
board outside the property. The managing agents asked us to send the keys to the new commercial property agents so that they
could allow people in to view it. We have a 2nd shop which is financially viable, but we are worried that the landlord may
pursue us for unpaid rent after september 2010, and ultimately we will lose our house and the remaining business. If he took
us to court for the unpaid rent could we possibly lose our house and the stock from the remaining business?
We have tried very hard to market this property to other businesses including cash converters franchisees and booze busters
franchsees to name but a few. We have closed the business down that operated from this location because we were losing less
by doing this than if we were to keep it open. The rent payable per anum is £35,000 + vat. By closing it, because the
building was listed, we saved £16,500 in business rates, and we have no staff costs, but still cannot afford to pay the rent
due.
If a court heard that the 1st business was viable, would it be more than likely that they would make an installment order to
repay the debt owed on a monthly basis, or do you think that they would force us to sell our home and cars?
Hi Dave
The first thing to do is look at your lease. Most professionally drafted commercial leases will state that the tenant is to pay rent without set off or deduction. This means that the tenant cannot withhold payment of rent even if they have a valid grievance.
However, such a clause does not prevent a tenant claiming back compensation once they have paid the rent, if there has been a breach of the lease by the landlord. In order to examine whether this is the case, the starting point is again the lease. It is common for commercial leases to expressly reserve the right for the landlord to erect scaffold without this constituting a breach of the lease. Even if the lease does not expressly mention scaffold, if you as landlord have an obligation in the lease to maintain the building, it will probably be implied that you can erect scaffold to carry out works without this being a breach of the tenant’s lease. You need to check these lease provisions or instruct a solicitor to do this for you.
In the meantime check the provisions for payment of rent, if it contains the magic wording excluding set off or deduction, than you can force the tenant to pay by exercising your remedies under the lease for non-payment, thereby getting a win in the short term.
Regards
John
Hello John,
I have a tenant of a commercial lease property who is refusing to pay monthly rent because of scaffolding that I have erected in order to perform essential remedial work on the buildings roof. The scaffolding stretches across the entrance to the shop but does not obscure signage or windows.
What can be done in this situation?
Many thanks
Hi Annette
I’m sorry to hear of your predicament. From my experience, leases from pub companies are always heavily skewed in favour of the landlord, more so than most commercial leases. With regard to the payment of rent, the first place to look is your lease. Most leases state that rent is paid in advance, sometimes quarterly and occasionally monthly in advance. It is unusual for a lease to state the rent is to be paid weekly in advance. You will need to look at your lease to find out when rent is due to be paid.
If rent is due, the landlord is entitled to instruct bailiffs to seize your goods and ultimately sell them if the rent is not paid up to date. I suspect this is what the landlord has done in your case. The best course of action is to try and come to some arrangement with your new landlord for the repayment of any rent arrears as soon as possible.
Sorry I can’t offer any quick fix solution, but when a tenant is in arrears of rent in respect of a commercial lease the odds are firmly stacked in the landlord’s favour.
Regards
John