By Hasin Tariq Amin, Associate Solicitor, Commercial Property Dispute Resolution, WHN Solicitors. Recognised by the Legal 500 as a recommended lawyer.
A commercial lease is one of the biggest fixed commitments a business will ever take on, and unlike most contracts you will sign, you are stuck with it. There is no cooling-off period and no easy exit unless you negotiated one before you signed. A term you accepted without much thought on day one can still be costing you money in year eight.
Knowing how to lease commercial property on terms that work for you as a business tenant comes down to a handful of decisions made before anyone signs anything. Get those right and most disputes never happen. Get them wrong and you spend the rest of the term living with the consequences.
Signed, Sealed and Leased is a four part video series from WHN Solicitor’s Commercial Property Dispute Resolution team, covering the life of a commercial lease from start to finish. This article is the written companion to the first video, which you can watch below. It deals with what to establish before you commit. The three that follow cover breaches during the term, ending a lease, and what happens once it has ended.
What is a commercial tenancy agreement?
A commercial tenancy is the legal right to occupy premises for the purposes of business. A common misconception that can catch people out is that a commercial tenancy agreement does not need to be written down or formally granted for it to exist. For example, certain types of occupation can create a tenancy by conduct or discussing a new lease may create a tenancy at will, which means the legal relationship begins before either party ever signs anything.
However, no signed lease does not mean no obligations. So while you can occupy without a formal agreement, it would not be advised. Sorting out the basis of your occupation at the outset is almost always cheaper than untangling an informal arrangement after the relationship has soured.
What is the difference between a lease and a licence?
In commercial property, the difference between a lease and a license focuses on one thing above all else: exclusive possession. If you have the right to control who comes and goes, including the landlord, you probably hold a lease, whatever the document is called. If you only have permission to use the space, whether by sharing it or because it is subject to the landlord’s right to enter, it is more likely a licence.
The label the parties agree on is not decisive. A document headed “licence” may still be held to be a lease if, in practice, exclusive possession was granted in exchange for rent. What the document says it is and what it actually is are two different questions, and it is the second one that matters if a dispute arises.
What is security of tenure, and does your lease have it?
Security of tenure is a statutory right that permits a tenant to stay in the premises when the term runs out. It applies automatically under the Landlord and Tenant Act 1954, unless the lease has been deliberately excluded from the Act, which is known as “contracting out”. Whether your lease is protected or contracted out is the first thing to establish about your renewal rights.
Where the lease is protected, the landlord can only refuse renewal on limited statutory grounds and must follow a set procedure in order to do so. This gives a tenant a degree of certainty over the future of their premises.
Where the lease is contracted out, none of that applies. The lease ends automatically on expiry, with no right to renew and no obligation for new terms to be offered.
Contracting out is common and it is agreed before the lease is granted, so this is a question to settle while you still have negotiating room, not one to discover in the final year of your term. Renewals and terminations are among the most frequently contested issues between commercial landlords and tenants.
What questions should you ask before signing a commercial lease?
Prior to signing a commercial lease, the terms most worth your attention are the ones that determine what happens when circumstances change: repair obligations, the rent review basis, break clauses, permitted use, and the service charge all fall under this category. The headline rent and terms are reviewed and negotiated very carefully, it’s the rest that often catch tenants out.
Two questions dominate all of these discussions: do you hold a lease or a licence, and does the 1954 Act apply to your case? Settle those first, then work through the individual terms prior to signing.
- Repairing obligations: Establish what standard you are being held to, and record the condition of the premises when you take them on. A schedule of condition attached to the lease does exactly that, and negotiating one now is far cheaper than defending a claim later. Landlords tend to resist them, but push for it anyway.
- Rent review: Check the basis on which your rent will be reviewed and how often, not just what you are paying on day one.
- Break clauses: A break clause is only as good as your ability to meet the conditions attached to it. Tenants often lose the right to break on technicalities, so check those conditions before you rely on it as your exit route.
- Permitted use: This governs what you can lawfully do at the premises. A use permitted under the lease is not automatically permitted under planning, and the two need to line up.
- Service charge: In shared buildings this can add materially to your annual cost, so check what yours covers and whether it is capped.
Get advice before you sign
If you are working out how to lease commercial property without inheriting problems you cannot get out of, having the terms and your position under the 1954 Act reviewed before you sign is the point at which advice is most valuable and least costly.
The commitments that cause disputes years later, including repairing liability, break conditions and security of tenure, are all settled at the start. They are considerably easier to shape before signing a lease than to argue about afterwards.
Hasin Tariq Amin is an Associate Solicitor at WHN Solicitors specialising in commercial property dispute resolution and landlord and tenant disputes. Recognised by the Legal 500 as a recommended lawyer, and with over eight years of post qualification experience, he acts for landlords, tenants, developers and property owners on the disputes that arise across the life of a lease, from repairing obligations and dilapidations claims to break notices, forfeiture and lease renewals.
That experience with contentious landlord and tenant situations is what informs the advice Hasin gives at the outset. To discuss a commercial lease, fill in our contact form. Alternatively, contact Hasin on 0161 761 8089 or by email at hasintariq.amin@whnsolicitors.co.uk.
What happens next?
Once you are in the lease, the obligations begin to bite, and that is where most disputes start. The next article in this series looks at what happens when the terms of a commercial lease are breached, by either side, and how those breaches are dealt with.
