Solicitors will always advise their clients to document any arrangement thoroughly, and for good reason. While it may never be necessary to refer to what has been documented, the financial implications of failing to do so when there is a disagreement could easily exceed the cost of putting in place an agreement every time.
There is therefore a balancing act between an informal arrangement that is simple and expedient, and a formal one that will offer protection but not unduly delay a letting or be at a cost that is disproportionate to the rental yield.
Those costs can be mitigated with a simplified form of lease which is less daunting for tenants who do not wish to themselves incur costs, or easier to negotiate with solicitors if they do choose to instruct their own representative. Of course this arrangement cannot be all encompassing, but each lease can be tailored to focus on specific provisions that are more likely to lead to a dispute, or those which if missing would have a greater financial impact.
Whilst this may seem obvious, the consequences could be significant if a lengthy term had been agreed only for the tenant to vacate after a short period. Without a documented term, a ‘periodic tenancy’ will be deemed to be in place, meaning that the tenancy continues month-on-month or quarter-on-quarter (depending on how often the rent is paid), with that time frame also being a notice period. Also see the ‘security of tenure’ section for another negative consequence of this.
Aside from the minimum term, any ability for the tenant to terminate the lease mid-term should be stated to be conditional on the payment of rent and returning the property free of occupation (either by them or a third party).
Repair/extent of demise
The key here is not so much specifying that the tenant will be responsible for repairing the demise (which is of course needed) but being clear exactly what is within the term ‘property’ or ‘premises’.
Generally, a lease of part of a building will exclude structural items, floors and ceilings, roofs, service media not exclusively serving the demise and external surfaces. Provision will therefore need to be made for the maintenance of those items and recovery of any associated expenditure (see below). The other key consideration is the standard of repair, and whether or not the tenant should be afforded a ‘schedule of condition’.
Utilities/common items/service charge
Unless there are specific provisions allowing you to do so, you will only be able to recover a rent payment from the tenant (the courts will rarely interpret an ambiguous arrangement in favour of the party seeking to enforce it in a particular way). There may however be significant items of expenditure that the tenant should be expected to contribute towards.
This would include all costs associated with the provision of services to the demise, the cost of maintaining the building of which the demise forms part, and the cost of maintaining areas over which the demise enjoys a benefit (whether that be access or amenities).
Aside from utilities for which the tenant should pay direct where possible, payments can be ad hoc or regular, and are generally linked to actual expenditure and apportioned based on square footage or usage.
Security of tenure
Security of tenure is the statutory right for a tenant of business premises to be granted a new lease on the same or similar terms as their most recent lease. The aim is to give tenants business continuity, but it severely restricts the landlord’s freedom to deal with their property as they wish. If a tenant has security of tenure, a landlord will need to rely on one (or more) of a fixed number of grounds to refuse a tenant a new lease. In full these are:
- the demise is in disrepair
- the tenant is in rent arrears
- the tenant is otherwise in breach of the terms of the lease
- suitable alternative accommodation has been offered
- the lease was an underlease of part that prevents a new (and more beneficial) letting of whole
- the landlord intends to re-develop the demise
- the landlord wishes to occupy the demise itself.
Grounds 4-7 are considered ‘no-fault’ grounds, and as such compensation is payable if they are successfully relied on. Fortunately, it is possible to require a tenant to ‘contract out’ of their statutory right to security of tenure, and most leases are granted on this basis.
To achieve this, a tenant will either need to sign a declaration at least 14 days prior to completion, or swear a statutory declaration in the presence of a solicitor.
Note that a tenant only needs to be in occupation for 12 months in order to qualify for security of tenure. This would include an initial six-month term that has continued after its expiry in a periodic manner as referred to on the previous pages.
Other things to consider
It is a legal requirement that all commercial properties marketed for sale or letting have a valid (not more than ten years old) Energy Performance Certificate. Additionally, the property must have a minimum rating of E unless an exemption can be relied on. The exemptions include listed buildings if meeting the minimum standard would unacceptably alter them, temporary buildings (maximum two-year use), non-residential agricultural buildings with a low energy usage and detached buildings with a total floor space of less than 50sqm.
In addition to the above, commercial properties must have an asbestos survey and plan, fire risk assessment and health and safety assessment, all of which must be kept up to date. Whilst these items can be carried out on a self-certification basis, it is most common for specialists to undertake each element, particularly in relation to asbestos. Once a lease is in place responsibility for complying with such items can be passed to the tenant. The landlord will however remain liable for any communal areas. Finally, you should consider whether or not to request some form of surety from the tenant, specifically a personal guarantor and/or rent deposit. The former are more commonly requested for corporate tenants, and the latter are typically between three and six months’ worth of annual rent.
Unlike with residential properties, there is no deposit registration scheme. Funds need only be placed in a separate interest bearing account. If VAT is payable on the rent, a sum equivalent to VAT should also form part of the deposit. This will not however be a supply for VAT purposes.