Agreeing the terms of a lease with a prospective tenant prior to drafting the lease will save considerable time and money further down the transaction. If the parties are fully aware of the terms of the agreement it is likely to reduce disputes and consequently avoid delays and further legal costs.
Below is a non-exhaustive list of the points which should be discussed:
Length of Term of the Lease
The term should be fixed for a set period. Tenants now prefer leases to be shorter in length because of the requirement of the Land Registry for registration of leases with terms greater than 7 years and secondly because the Stamp Duty Land Transaction Tax is greater for longer terms.
Security of Tenure – Landlord and Tenant Act 1954
This Act preserves the right of a business tenant to stay in the property at the end of the lease. If the provisions of the Act are not excluded then the tenant will be entitled to remain in occupation at the expiration of the fixed term and have a right to apply to the court for the grant of a new lease.
This is expensive and time consuming, and in certain circumstances the tenant may be entitled to compensation for failing to obtain a new tenancy.
Allowing a tenant access to the premises before legal formalities are completed can also establish security of tenure and invalidate any subsequent agreement to exclude the Act.
Rent & Rent Review
Consider the initial rent and whether there is to be provision in the lease to increase the rent. If so, when and how is the rent reviewed? Rent review provisions are usually by way of reference to an index or the open market value of the premises at the date of review.
The service charge is often a contentious issue whenever a property is divided between two or more tenants. It includes such items as lighting, cleaning common parts, repair and maintenance, security etc.
The service charge can be dealt with by way of an all inclusive rent or by apportioning the charge between the tenants. Advise the Tenant of the likely apportionment and list the services you intend to provide.
This restricts the tenant’s ability to assign, or sublet the premises in whole or to sublet any part. Most leases will prohibit the tenant from assigning the lease without the landlord’s consent, allowing the landlord to decide whether the new tenant is suitable and has adequate finances to meet the rent.
On assignment the original tenant will no longer be bound under the original lease once he has parted with his interest. It is therefore wise to insist on an authorised guarantee agreement whereby the original tenant will enter into a guarantee with the landlord.
Guarantors and Rent Deposit
If the financial standing of the tenant is uncertain, a landlord will often require a guarantor and/or rent deposit. Ascertain whether the proposed tenant is an individual or a company. Insist on a guarantor if the tenant is a newly formed company. Alternatively, the landlord can take a rent deposit from the tenant upon which he can draw in the event that the landlord breaches the lease.
It is not obligatory for the tenant to pay the landlord’s legal costs. Advise the proposed tenant at the beginning that you require him to be responsible for such charges. Instruct a firm of solicitors that specialise in these matters and are able to provide a fixed fee.
If a prospective new tenant is forewarned of these issues your solicitor will be able to complete the lease faster and consequently you begin receiving the rent sooner. This approach also helps to prevent subsequent problems when the term expires or is renewed. Remember that any heads of terms agreed should be clearly expressed to be ‘subject to contract.’
For further advice on commercial property conveyancing, please contact Rhidian Hobbs at Howells Solicitors on 02920 404020 or email firstname.lastname@example.org.