FAQs For Landlords
I am looking to grant a lease – what steps do I need to take before a lease is signed?
Before instructing a solicitor and signing a lease, we would highly recommend that you instruct a property agent (or surveyor) to agree on the commercial terms and conditions of the lease on your behalf (known as heads of terms). The surveyor will ensure that those terms match the parties’ requirements and that you fully understand them. In our experience, the early days of negotiation are a key time to resolve important issues and differences and will lead to a smoother, more cost-efficient transaction.
The terms that need to be considered include the following:-
- Rent and rent review – will the rent be a fixed amount or a stepped amount and will it be subject to RPI reviews or an open market rent review? if it is an open market rent review, then are there any unusual assumptions or disregards to take into account for the hypothetical lease (you should speak to a surveyor for expert advice)
- Repairing obligations – will the lease be on a full repairing and insuring basis or will repair liability be limited by way of a schedule of condition. Are there any other considerations such as environmental liability or construction defects affecting the property?
- Alienation – how much flexibility does the tenant have to assign the lease or underlet the premises, what assignment or underletting conditions will be imposed on the tenant?
- Break clauses – what conditions will the tenant have to comply with to enable them to exercise the break, will the tenant have the benefit of a rent-free period if they do not exercise the break?
- Alterations – how much flexibility does the tenant have to carry out alterations to the property, what level of alterations are permitted with or without your consent, what reinstatement obligations will be imposed?
- Service charge – what proportion will the tenant pay, how has this been calculated, what services will you be obliged to provide, will there be a service charge cap?
It is easy to get caught up in the pace of negotiations, especially if there is pressure to “close the deal” quickly, but it is important that you take the time to understand all of the terms, the obligations imposed and the financial implications of these before you agree to anything. Important points for a lease, such as those listed above, should be addressed at the earliest opportunity. Before final heads of terms are agreed, you may wish to check these with your solicitor to ensure that your specific requirements have been taken into account and that there are no points where ambiguity might arise when drafting begins.
I have bought a commercial property – what are my responsibilities as a commercial landlord?
Landlords of commercial premises have several health and safety responsibilities and generally need to ensure that their premises are safe for their tenants and anyone else who may use them (for example, visitors). However, due to the responsibilities of commercial landlords being more ambiguous than the clearly defined rules relating to residential landlords, there is often confusion as to who is responsible for what. There can be considerable overlap between the responsibilities of landlords and tenants, and the extent of those responsibilities will also depend (in part) on the nature of the premises and the terms of the lease.
Health and safety – generally tenants will shoulder the greatest amount of responsibility in this respect. For example, tenants are responsible for complying with health and safety (including Fire Safety) regulations in relation to the premises that they let, but landlords are responsible for ensuring that any communal areas are health and safety compliant.
Fixtures and fittings – landlords must ensure that their fixtures and fittings have been installed and maintained properly and safely. Likewise, tenants will be responsible for their own fixtures and fittings. Note, landlords commonly look to pass responsibility for maintenance of landlord’s fixtures to tenants under the terms of the lease.
Gas – depending on what the lease says, responsibility can be the landlord’s, the tenants or both parties. A landlord will, however, be solely responsible for gas installations in communal areas.
Electricity - landlords must ensure that their premises’ electrical system is safe. It is recommended that landlords ensure that an “Electrical Condition Report” (EICR) is carried out by a registered electrician before letting out commercial premises and give a copy of the EICR to the tenant. Tenants are responsible for the safety of electrical appliances that they have brought onto, and installed in, the premises. Note, landlords commonly look to pass responsibility for the maintenance of a landlord’s electrical equipment to tenants under the terms of the lease. A landlord will, however, be solely responsible for electrical equipment in communal areas.
Maintenance and repair – the landlord’s and tenant’s responsibilities will be set out in the lease and will largely depend on the nature of the premises being let. For example, in a lease of a floor of an office block, the landlord would retain repair and maintenance responsibility for the structure (i.e. foundations, roof, exterior and loadbearing walls), whereas the tenant will be responsible for non-structural parts. Alternatively, in a lease of an industrial unit, it is common for the tenant to be responsible for the whole of the property (including structural parts).
Asbestos – responsibility in this respect will be dealt with in the lease, and again will largely depend on the nature of the premises being let.
Fire safety – the “responsible person” (under fire safety laws) is usually an employer. As such, responsibility will likely fall on a tenant. Note, a landlord will, however, be solely responsible for the fire safety of communal areas.
Energy performance – landlords of commercial premises must (before entering a lease) provide their prospective tenant with an Energy Performance Certificate (EPC). An EPC shows the energy efficiency of premises using a rating scale from “A” to “G” and incorporates recommendations of how energy efficiency can be improved. Landlords can no longer grant new leases of premises that have a rating below “E”.
My tenant wants to terminate its lease early – can they do this?
The answer to this partly depends on what the lease says. A commercial lease will usually only end on the date specified in the lease unless a clause has been included in the lease allowing a tenant to end it earlier; known as a “break clause”. If the lease contains a break clause, and the tenant has met any preconditions in that clause, the tenant can terminate.
Alternatively, if a lease does not contain a break clause, and your tenant has approached you to terminate its lease early you could choose to agree (but you would have no obligation to) to allow the termination to go ahead. This process is known as a “surrender”. Often, a landlord will agree to allow a tenant to terminate early if the landlord will easily find a replacement tenant and/or the outgoing tenant makes a payment to the landlord in return for allowing that tenant to leave early.
What does “protected” lease and “contracted out” lease mean?
The Landlord and Tenant Act 1954 (LTA 1954) gives tenants of business premises the automatic statutory right to a new lease of their premises after the contractual term of their existing lease expires (a concept known as "security of tenure"). However, the LTA 1954 includes a mechanism for landlords and tenants to agree that a lease of business premises will be excluded from those “security of tenure” protections; a mechanism known as “contracting-out”.
A “protected” lease is, therefore, a tenancy of business premises where the tenant has the statutory right to a new lease. A “contracted-out” lease is a tenancy of business premises where the tenant’s right to a new lease has been excluded (i.e. the tenant does not have the statutory right to a new lease).
Are the terms and conditions that are contained in leases regulated or standardised in England and Wales?
In short, no, the terms and conditions of leases are not regulated in England and Wales. The Royal Institute of Chartered Surveyors has a “Code for Leasing Business Premises”, which has recently been updated, with the new Code being applicable from 1 September 2020. The majority of the Code is not mandatory, but it provides good guidance for how to conduct commercial lease negotiations. There are certain aspects of the Code which are mandatory for RICS professionals and firms to adhere to, which relate to the negotiation and preparation of comprehensive heads of terms.
Here is a link to the new Code.
What is a “green lease”?
A “green lease” is a commercial lease that includes provisions that have the purpose of either encouraging or expecting landlords and tenants to commit to taking positive actions to reduce the environmental impact of the premises. “Green leases” are (in part) a reaction to increasing concerns over climate change and the real estate sector’s contribution to carbon emissions.
My tenant is thinking of selling their lease – do I have a say in who the tenant sells the lease to?
The answer will depend on what the lease says. Leases of commercial premises commonly restrict a tenant’s ability to sell or pass (in legal language, assign) the lease to another person without the tenant first having to get the landlord’s consent. Often, the lease will say that the landlord must act reasonably and quickly (without delay, in legal language) if the tenant asks for consent.
You may be entitled to enquire as to the “covenant strength” (i.e. the ability to pay the rent and perform the other obligations in the lease) of the new tenant. You may also be entitled to impose conditions on the giving of your consent, such as asking the new tenant to give a rent deposit or a guarantor.
A landlord’s consent is usually given formally by deed using a document known as a “licence to assign”. We recommend that you instruct a solicitor to draft and negotiate such licences. A tenant will usually have to pay its landlord’s legal costs for dealing with these matters.
My tenant is thinking of making alterations to my property – do I have a say about what alterations can or cannot be done?
The answer will depend on what the lease says. Leases of commercial premises commonly restrict a tenant’s ability to alter or carry out works to the premises. Generally, "minor" internal non-structural works will be permitted on the proviso that the tenant gets the landlord's consent, but structural and/or external alterations are often prohibited.
A landlord’s consent is usually given formally by deed using a document known as a “licence to alter”. We recommend that you instruct a solicitor to draft and negotiate such licences.
The tenant is struggling to pay their rent and has approached me for a rent concession, do I have to agree to this?
It is at your discretion whether or not you agree to give the tenant a rent concession. Under the terms of the lease, the tenant must pay rent, however, you need to consider if it makes commercial sense to work with the tenant, especially during an economic downturn, to avoid having a vacant property.
If you wish to grant the tenant a rent concession, then you must ensure that you formally document this agreement. You should consult your solicitor to assess which document would be most appropriate in your circumstances. We do not recommend that you proceed on an informal basis, as this can lead to later disputes and the nature and impact of the agreement must be properly considered. The factors to think about will include the period of the concession, interest payments, the effect on a future rent review and further consents may be required by a superior landlord, a lender or guarantor. You can formally document the rent concession by way of a side letter or a deed of variation. A side letter may be appropriate to document a temporary arrangement and a deed of variation for a permanent change to the lease.
The tenant and I have agreed to some changes to the terms of their lease, how should I document these changes?
A landlord and a tenant may decide to vary an existing lease: this may involve removing a term from the lease, adding a term to the lease or changing an existing term of the lease. Common variations include changing the permitted use of the property, varying the rent, removing a restriction on the tenant, adding an additional right for the tenant etc.
We do not recommend that you deal with this on an informal basis as any variations carried out in this manner will be unenforceable and could lead to later disputes. The nature and impact of your agreement must be properly assessed. This does not mean that you can simply cross out, insert a term or write over a term on a copy of an existing lease. Once a lease has completed, any variation to its terms must be formally documented by way of a deed of variation. This is a document which supplements the existing lease and evidences the agreement to the changes between the parties. You will also need to consider whether or not further consents will be required by a superior landlord, a lender or guarantor as this can impact on costs and timescales.