The relationship between a landlord and a tenant of a business premises is set out under The Landlord and Tenant (Amendment) Act 1980 as amended by the Landlord and Tenant (Amendment) Act 1994. A business letting is a simple fact of commercial life, whether it is for the short term (up to 5 years) or for the long term (5 years or more). The landlord’s position should not overshadow the tenant’s position and vice versa. While a lease needs to contain clauses to provide protection from a legal point of view to both parties, it should also be workable from a commercial standpoint. This article sets out in brief some of the main issues which a tenant needs to be aware of when negotiating the terms of a commercial lease.
A tenant needs to ensure that the permitted user of the premises covers the full extent of the tenant’s business and the potential for change in the future. This is particularly relevant for a long term lease where a tenant’s business may evolve over time. The permitted user in the lease needs to be wide enough to incorporate such a change but also have regard to any prohibited uses of the premises as specified by the landlord. It is also important to be aware of any exclusivity being offered by the landlord to tenants of adjoining premises or units which may cause a conflict to the tenant’s business. Once a lease is signed by the tenant, subsequent exclusivities offered by the landlord to other tenants should be resisted for this reason. Alternatively, where the landlord offers the tenant exclusivity as part of the lease, it should be clear whether this is restricted in any way in terms of duration, assignability and so forth.
It is important to note the distinction here between a short term lease and a long term lease. The repair obligations of a tenant under a long term lease will be more onerous. Careful consideration should be given to the wording of the repair clause itself. A tenant should establish the state and condition of the premises from the outset. This is usually done by way of a survey carried out by a qualified person and will include photographs taken of the premises. Ideally, this survey should be attached to the lease as it forms a very useful reference point however the landlord has to agree to this. A tenant should not be obliged to carry out repairs or to maintain the premises over and above the condition of the premises as set out in the survey. Furthermore, the tenant should ensure that there is an exception of “fair wear and tear” incorporated into the repair clause. A newly-built premises is not going to be in the same state and condition ten years later even with repairs and maintenance carried out by the tenant.
A tenant should always have the option or flexibility to assign, sub-let or share possession of the premises to a third party. This is particularly relevant for a long term lease. This will require the landlord’s consent, but such consent should not be unreasonably withheld. In the event that such consent is withheld, the onus is on the tenant to prove that the landlord is doing so unreasonably.
In a lease of ten years or more, a five year rent review is a standard provision. The rent review should be stated to be at “an open market rent”. It is worth noting that Section 132 of the Land and Conveyancing Law Reform Act 2009 prohibits an upwards only rent review clause in a lease granted on or after the 28 February 2010. From that date, all leases which have a rent review provision allow the rent review to be greater, less or equal to the rent as set out in the lease.
In particular in relation to a long term lease, it is advisable for a tenant to negotiate a break clause. This gives the tenant the option to terminate the lease before the end of the term of the lease. If this provision is agreed with the landlord, the lease will provide for a notice to be served on the landlord within a certain time period and will put the landlord on notice that the tenant wishes to exercise its option to break the lease. A landlord will often set out strict criteria which the tenant needs to comply with in order to break the lease. Careful consideration needs to be given to this as often what would seem to be a relatively straightforward procedure can turn out to be very complex if the criteria set out by the landlord are too restrictive, broad or indeed too vague.
When entering into a lease as a tenant, it is important to be aware of whether there is a head lease in existence. In other words, is there a lease of the premises in existence between the landlord and a superior landlord that affects the lease being entered into by the tenant. Often a lease will include a clause which states that a tenant will be obliged to comply with all of the covenants in the head lease. This may prove to be particularly onerous for a tenant with a short term lease of the premises. The tenant needs to ensure that by entering into the lease with the landlord, it is not entering into any agreement to comply with covenants of a head lease that are unreasonable in the context of the tenant’s own lease.