Landlord and tenant: 'Heads' up on how to avoid disagreements
PUBLISHED: 11:26 01 June 2018 | UPDATED: 16:13 01 June 2018
Dan Evans, of Cozens-Hardy LLP, and Graham Jones, of Roche Chartered Surveyors, look at a few common areas of disagreement between landlord and tenant. For the purposes of this article, Graham is giving his views as if acting for the landlord and Dan is acting for the tenant.
When taking a new commercial lease, the first step is to agree “Heads of Terms”, which set out the major terms of the deal.
Once agreed, this forms the basis on which the lease is drafted. Ironing any points of disagreement at this stage goes a long way to ensuring solicitors agree the draft lease quickly.
Should the lease include automatic rights of renewal?
DE: These rights are very important from a tenant’s perspective. They give an automatic right to a new lease at the end of the term. Do you want to be in a position where you have built up your business only to be forced to move premises at the end of your lease? Without the automatic rights this is a real possibility.
GJ: There could be a number of reasons for not granting renewal rights but most commonly it will be to help retain some control over the future of the property and/or the wider estate.
For example it may be appropriate for the landlord to have the ability to redevelop in the property or site in the future or to control the future tenant and user mix of an estate or scheme (for example, a shopping centre) to keep it relevant and viable. Tenants commonly insist on the flexibility to break a lease and it is therefore sometimes appropriate that this flexibility is mutual.
Are all leases full repairing?
DE: A full repairing liability, while an industry norm, is a very onerous obligation on a tenant. It places an obligation on a tenant to repair the property and generally does not take into account the state of the property at the start of a lease, meaning you may be required to improve the property.
In some circumstances a landlord may agree to limit liability by preparing a “Schedule of Condition”, which evidences the condition on day one. This is by no means standard and it will involve negotiation. A tenant should always undertake a survey to identify any problems before signing the lease.
GJ: The vast majority of commercial leases are drawn on effectively full repairing and insuring terms. It is important that both the tenant and the landlord understand the requirement to maintain and repair the property during the term of the lease and what condition it should be returned in when the lease ends.
As commercial tenants invariably carry out fitting out works and control occupation of the property it’s rarely appropriate for the repair liability to sit with a landlord. Disrepair can significantly affect the value of a property and it is therefore critical to a landlord that the tenant does not ignore his/her responsibilities.
Should there be conditions attached to the break clause?
DE: The whole point of a right to break is to enable you to walk away from the lease at a set point. Modern trends tell us this right should be unconditional and attempts to add conditions (such as having complied with the lease terms) should be strongly resisted.
That being said, the requirements for rent to be up to date and the property returned free from any sub-tenants are generally acceptable. The inability to successfully terminate a lease can be an expensive error to make.
GJ: Landlords should aim to ensure that the rent is paid up to date and the tenant has actually given up occupation of the property at the break date. Failure to comply with these two requirements would be reasonable justification to invalidate the break clause.
Occasionally insisting other covenants within a lease (such as repairing obligations) are met as a condition of the break option would be appropriate, especially if they form fundamental elements of the original transaction – for example, an obligation to carry out works in return for rent free.
Can I sell my lease?
DE: The ability of a tenant to “deal” with their lease is an important part of any lease. While a tenant may sign up with the full intention of staying for the whole term, plans change and a tenant may look to dispose of the lease mid-term. This is principally achieved by “assigning” the lease to another tenant, but sub-letting is also common.
A lease should set out the circumstances where a landlord can withhold consent, as well as setting out conditions or requirements they may impose. In all situations a tenant should insist on a requirement for a landlord to act reasonably in considering any consent application. Tenants should be especially wary of a common requirement that forces them to guarantee the incoming tenant’s performance.
GJ: Most landlords will grant leases allowing tenants to either assign (transfer the lease) or sub-let the entirety of the property. On occasions, a sub-letting of part may be acceptable (where the property is capable of being sub-divided – for example, multiple floors within a building).
However, to preserve the value of the property and its use, the landlord will need to have the ability to reasonably approve who the lease is assigned or sub-let to and that the terms of the transaction reflect market conditions and do not “dilute” the quality of the tenant. There are some occasions when it is appropriate to prohibit alienation, such as when dealing with historic buildings or granting very short flexible leases when absolute control on the identity of the tenant will be important.