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Landlord and tenants: How clean is a clean lease?

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Landlords and tenants have always been able to agree a whole range of different deals for different circumstances.

Even in the present market with lower rents and shorter terms on offer a lease of commercial premises, be it a shop, an office or an industrial unit is a transaction that both sides need to consider with care and proper advice… The lease is the Landlord’s document and it is designed to protect the Landlord’s income Sometimes you’ll hear the term a “clean lease”… It means the landlord gets clear income with no deductions from the rent for expenditure.  From the Landlord’s point of view that is important-. That is what his bankers will expect to see in place.

The trade shorthand is” and FRI Lease.” or full repairing and insuring I’ll pick up just three of the “headline” areas

The repairing obligation gives rise to most problems- usually at the end of the lease .A typical covenant would be “The Tenant shall keep the Demised Premises clean and tidy and in good and substantial repair and condition”

Often this is assumed to include a degree of “fair wear and tear”. Not so. The landlord will expect- and  in fact is entitled to  require that the unit is  returned at the end of the term in a state of  repair such that he could re-let it the next day without a void period while the  premises are brought back up to  lettable condition.- If that is not the case the tenant will face a sizeable dilapidations claim.  A well advised tenant will have had surveying advice on the property before the lease is signed but even then the lease needs to be looked at carefully-. Just what is the tenant to repair and  replace? The, the door  fastenings the wash hand basin, the shop windows, the carpets, the  roof trusses-? It can soon turn into a very expensive obligation.

It’s easy to agree what the rent should be the rent at day 1 and often for  the next years as well but  a  longer lease will usually  contain a rent review clause providing for the rent to be increased  usually every five years.

Often the rent review provisions start  about page 52 and  they are often not “ user friendly”  and they have to be read along side the “ user “ clause.  One of the best pieces of advice I ever got was when reading a lease to start with the rent review clause.  That remains true whether acting for the landlord or the tenant. The basics  of the rent review clause is to determine what rent a hypothetical land lord and a hypothetical tenant would  pay  in five years time if they were negotiating a new lease of the property then.

Sometimes the  terms of the theoretical new letting are quite different from the terms of the deal the parties have just done., Recently on e of the large financial institutions sold off a chunk of it’s property portfolio.  The user clause allowed the tenant to use the properties for a wide range of  uses-including as a “trendy wine bar”.

The rent review clause however provided that the rent review was to be only on the basis of the original use or a retail shop.. So the buyers may well find in five years instead of a certain bank they have  a  wine bar as a tenant but they are trying to decide what the correct level of rent would have been if it had remained a bank. That’s an extreme example but it shows how it’s possible for the theoretical lease  can become divorced from what parties might  agree if they had sat down  and talked it through at the outset.

Another issue is alienation- that is can the tenant assign or transfer the lease or sublet  the property to someone else. Again these provisions are  common to most leases over  a year or two in length but on what terms. It’s now industry standard to require an outgoing tenant to give an AGA (  shorthand for an “authorised guarantee agreement”  rather than an upmarket stove) but  can the landlord insist on  a rent deposit from   the assignee or even personal guarantees if the lease is to pass to a limited company. That might make it more difficult to get rid of a property which is surplus to requirements.

I’ve just picked up the three “ headline” clauses from a  standard commercial lease here and I’ve only just touched on a few of the areas that  need to be considered by both

The commercial lease has been the backbones of the commercial property market for the last hundred years and in the present economic climate with funding limited it will gain not diminish in importance… Leases need to remain workable and secure from the landlord’s point of view if Landlords are to provide new businesses with space   start and grow. On the other hand no-one gains by tenants signing up to standard documents which   don’t reflect the reality on the ground. A typical lease might easily deal with obligations which can last ten years and include financial obligations amounting to £1 Million so it needs to be right at the start for everyone’s benefit.

I’ve been dealing with commercial lease for the best part of twenty years now- if you are intending to let out property or take a lease of premises and I can help please contact me.


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