| Q |
I have a prospective tenant who wants to go into the property immediately and sort out the formalities later. Should I go ahead? |
| A |
This is not a good idea. It can be tempting but experience has shown that you are likely to cause yourself problems in the long run. Once the tenant is in, there is no incentive on him to conclude any legal formalities. There will be no proper obligations on the tenant and you may find you have given the tenant more rights than you intended or would like. In most circumstances a good solicitor will be able to draft the relevant documentation speedily to enable a tenant to take up occupation at an early date. |
| Q |
How can I make sure that I can obtain possession at the end of the Lease if I need to? |
| A |
The only method that is guaranteed is to have a Lease which is what is known as "contracted out" of the Landlord and Tenant Act 1954 Part II. This excludes the right of the tenant to have a new Lease at the end of the initial one or from being entitled to compensation at the end of the Lease. There are certain formalities which must be strictly observed. |
| Q |
Can I or should I charge VAT on the rent? |
| A |
This depends on the type of building and whether or not the relevant tax election has been made in respect of it. There can be advantages in a landlord being able to charge VAT but this is a complicated area and it is recommended that specialist tax advice to be obtained not only this question but also on other taxation issues relating to the property. |
| Q |
If I think that the tenant has broken the terms of the Lease should I still accept rent from them? |
| A |
No, not without first taking legal advice. You may otherwise prejudice your position. |
| Q |
My prospective tenant wants to negotiate a Lease giving them a right to end it early. Is this a good idea? |
| A |
This depends on what you feel is right for you and other commercial considerations such as market forces. However, if you agree in principle then it is probably better that the right to terminate the Lease can only be exercised after a certain interval rather than on a rolling basis. Consider making the entitlement to terminate early a mutual one so that you can also end the Lease early if you want. Also making the tenant's right conditional upon paying all rent and other monies due up to the termination date and even possibly paying you some money by way of compensation for the fact that you will have to re-let the property early. |
| Q |
How long should my commercial Lease be for? |
| A |
This depends on the circumstances, your needs and what the landlord will agree. It used to be the case that a standard commercial Lease was for 25 years but now they are commonly between 5 and 15 years and shorter periods are not unusual. If a Lease is for a longer period then you will have the certainty of being in the property for a longer time but there could be greater liabilities if you need to move but have difficulty in assigning (selling) the Lease. Consider trying to gain some flexibility by negotiating a "break clause" which will enable you to end the Lease early on giving notice. |
| Q |
Will I be liable under the Lease for the whole term? |
| A |
If you do not assign (sell) the Lease then yes. Otherwise, for most Leases granted after 1st January 1996 your liability under the Lease will end once you have lawfully transferred it unless the landlord is entitled to require you to enter into an "Authorised Guarantee Agreement" which would make you liable until the Lease was assigned again. |
| Q |
What about repairs? |
| A |
Questions about who is responsible for repairs are some of the most common causes of disputes between landlords and tenants. Great care must be taken otherwise you could end up with large unforeseen liabilities. Quite often Leases are drafted with repairing obligations which can make the tenant responsible for putting the property in a better state than when they entered into the Lease. What is reasonable as to who should be responsible for what in terms of repairs depends on the particular circumstances but as a general rule that the shorter the Lease the less onerous should be the responsibility on the tenant. So with shorter Leases it would not be appropriate for the tenant to be responsible for major structural repairs. Be careful about indirect liability for major repairs through any service charge. At the end of the day these matters do depend partly on the negotiating positions of the parties and market conditions.
One way of limiting your obligations is for you not to be required to put the property into any better state than it is at the start of the Lease. For this you would need what is known as a schedule of condition (preferably with photographs attached) prepared by a surveyor describing the condition of the building at the outset of the Lease and/or by having a service charge "cap". |
| Q |
Is there any way I can limit my liability in case things go wrong? |
| A |
One common way is to try to have the Lease taken in the name of a limited liability company. If you are already running a business through a limited company you may even wish to consider setting up a separate company for the purpose of holding the Lease to shield the assets of the trading company. However, there are additional administration costs and statutory obligations in running a company. The landlord may only agree if a security deposit is paid, or personal guarantees are given by directors. |
| Q |
What does "contracted out of the Act" mean? |
| A |
Under relevant legislation a business tenant is in many cases entitled to a new Lease after the expiry of the existing one. The only guaranteed way for a landlord to avoid this is to have a Lease whereby this right is excluded. This requires certain procedural formalities to be observed. If you agree a Lease which is "contracted out" it means that you will have no legal right to a new Lease at the end of the current one nor will you be entitled to any statutory compensation. |
| Q |
How do I go about agreeing terms of a Lease? |
| A |
You are strongly recommended to use the services of your own commercial estate agent who is experienced in dealing with properties of the type you are trying to let and/or of a commercial property solicitor. Depending upon the type of letting you may also need a surveyor. It is worthwhile getting advice at an early stage so that the most favourable terms for you are agreed in principle. Once something is agreed in principle it can then be difficult to persuade the landlord to agree to change it, although we have often been successful in negotiating better terms! |
| Q |
What else do I need to think about? |
| A |
It is difficult to cover all possibilities but some major points include whether you can use the property for your intended purpose. Your use, for example, may require planning consent or you may feel that alterations must be made to the premises before you can occupy. If so, you may wish to consider negotiating a rent-free period to cover the time taken for the alterations. You should also ensure that any necessary licences can be obtained and give consideration to the tax implications. |
| Q |
Why do I need a lawyer to negotiate my Lease? |
| A |
Leases are strictly construed which means that each word may be looked at in a technical way by the courts in the event of a dispute. For instance, if the Lease says the tenant is to renew fixtures and fittings rather than repair them the difference in cost in dealing with dilapidations at the end of the Lease can be enormous. The liabilities are so great that it is unwise not to take the utmost care before committing yourself. |
