The Foibles of Commercial Leases

industrial unitsI make no apologies for the fact that this article is aimed at the business fraternity. We are in the middle of uncertain economic times, particularly as Brexit looms and the Politicians don’t seem to be able to agree on anything regarding this subject. As I write we have 78 days to the day of reckoning, hopefully there will be a deal of some kind, so that the business fraternity have a certain environment in which to trade.

It is often stated by Economists that one of the main drivers for economic growth will be the establishment of new small businesses. The British are an enterprising lot and when push comes to shove there will be a whole plethora of new ideas which will lead to the formation of new companies. One of the main functions of the Politicians is that they have to create the right legislative environment for this activity to take place.

Nearly all economic activity takes place in commercial premises and that is where Sheldon Bosley Knight gets involved. We are commercial estate agents who deal with virtually every type of commercial premises you could imagine; shops, offices, warehouses or horticultural nurseries have all been offered for sale or rent by our firm. On the rented side they all have one thing in common, they employ a commercial lease to record and formalise the relationship between the freeholder, known as a Landlord, and the occupier, known as the Tenant.

There are various Acts of Parliament which govern the operation of commercial leases, but the main one central to these documents is the 1954 Landlord and Tenant Act, tried and tested, and modified over the years, which still lays down the fundamental rules that are used to operate these leases.

One of the main points of the Act is that for a lease to be created there has to be exclusive occupation of the premises. If occupation is shared then it is more likely to be a licence. A lease will have a fixed term. If it is a periodic lease this term may only be short, say if you pay rent on a weekly basis your lease term will be for a week, the same applies for monthly or quarterly payments. One of the main features of a commercial lease is however that it has to run for a period of time in excess of six months.

Leases can made verbally – the old fashioned handshake. As surveyors we would advise against this because people’s memories fade with time and the chances of two different people remembering all the points agreed at an initial meeting are almost impossible. That can lead to uncertainty and quite often dispute. Because of this most leases tend to be formalised in written format. The shortest one I have seen is a handwritten A4 sheet of paper. The longest one was approximately two hundred pages, but normally they are about forty pages long.

A Lease will record all the points agreed between the Landlord and the Tenant. It will identify the parties, confirm the length of the term of occupation, record the rent to be paid and the rent frequency, i.e. how often rent is to be paid. The lease will also list what the tenant’s obligations will be, particularly with regard to use and repair of the building and it is at this point where things often start to become contentious.  Although normally a long document the difference between a good lease and a bad lease can be a few words. Leases are legally binding documents and it is, in my opinion, essential for anyone entering into one to take proper legal advice before signing the document.

Once you have signed a lease you are legally bound to honour the agreement. If there is a dispute and you end up in court, the judge will look down at you and say ‘well you are a grown up person, you should take responsibility for your actions. Please get on and do what you said you would do’. If the lease says “put and keep” in the repairing covenant then you are agreeing to put the Landlord’s building into good repair and then maintain it for the duration of the term.  Three words and sometimes a very large repair bill – Ouch!

Taking proper advice at the outset is crucial and there are ways of limiting the repairing obligations to prevent these covenants from becoming too onerous on the Tenant. One way is to make the lease internal repairing only. Here the Landlord retains responsibility for repair of the main structure of the building and the tenant will be responsible for maintaining the inner surfaces of the accommodation.

commercial propertyOne other way of limiting your liability is to attach a schedule of condition to the lease. It can only be done by mutual agreement between the Landlord and the Tenant, as it does act to minimise liability for repairing obligations contained within the lease. These documents normally contain a description of the building and have a detailed series of photographs which will show the condition of the building at the commencement of the lease.

Most of the time these documents are put in a drawer and forgotten about, but at the end of the lease they can act as a brake on over exaggerated dilapidation claims. By having an accurate record of the condition of the building, a tenant can defend himself against unreasonable demands for work to be carried out when the building is vacated. The other recourse is to rely on a statutory cap on dilapidation works – this being laid down in Section 18 1 of the Law of Landlord and Tenant Act 1927. That tends to be a complicated valuation where reference is made to the diminution in value of the building in relation to the outstanding repairs. And that really is the province of a surveyors work.

As ever, if you need advice on any issues with dilapidations, feel free to call the office and discuss. If nothing else we can make sure you are on the right track if you are looking at entering into a new business lease. One client recently failed to do this, and after a year in occupation, he is facing a repair bill of in excess of £20,000, even though the annual rent was only £12,000 for the year. A few hours of a surveyors time would have largely prevented this from happening. And I have a feeling that post Brexit, these issues are going to become more important to deal with.

Tony Rowland SBK TLG
Tony Rowland BSc(Hons) MSc MRICS