This section deals with issues that should be considered when taking a lease of business premises.

1. Commercial Leasehold Premises

1.1 Introduction

In addition to the rent payable various matters should be considered before taking a lease of business premises which you will need to consider, having regard to your business needs and predicted business development. Flexibility is often key for any business.

The first step is locate suitable premises which physically and financially fulfil your needs. Commercial property agents are not only best placed to find premises that fulfil your requirements but also to negotiate the principal lease terms with the Landlord to ensure you are getting the best deal achievable. We have a wide number of contacts within the property industry and may be able to recommend a suitable agent to you. We also advise on the legal and practical effects of any terms proposed.

Once the main terms are agreed we will negotiate the lease documents for you, advising you as the practical and legal effects of the lease provisions and potential liabilities involved.     

1.2 Main Terms

Some of the principal common terms are below.

1.2.1 Term

The duration of the lease (the term) can be for any length. You should consider that your liabilities (including payment of rent and all other matters mentioned below) will run for the length of the term unless you have an option to terminate (a right to break) as below.  In addition Stamp Duty Land Tax, roughly equating to 1% of the aggregate lease rents during the whole term, will be payable. A right to break earlier than the expiry of the lease will not reduce the tax payable.

On that basis the ideal length of term is a balance between the shortest period required and the longest required to fulfil your business needs. Tenant’s often prefer leases of around 5 years with a statutory right to renew (see 1.2.3 below).

Any lease of over 5 years should ideally contain a right to break or at least be easily capable of being assigned or underlet without onerous conditions (see 1.2.8) if the premises become surplus to requirements or business outgrow them.

1.2.2 Right to break

A lease may have any number of rights to break and commonly they are exercisable upon 6 months notice. They are often subject to certain conditions which, if not fulfilled, will result in the right to break being lost and lease obligations continuing and therefore such conditions should be resisted at the lease negotiation state. In particular you should not agree a break is conditional upon there not being any breaches of the lease at the break date unless, at the very least, those breaches are limited to those that are material. Otherwise any minor and inconsequential breach could deny you your right to break.   

As the law interprets break clauses strictly you should ask your solicitor to serve any notice and to advise as to the lease requirements. It may also be sensible to try to tie the break dates into the rent review dates (see 1.2.7) so that you may have the opportunity of determining the term if, you receive an indication that rent may be increased to an unacceptable level.

1.2.3 Exclusion from Protection 

All tenant’s of business leases (provided they are in occupation and trading (and other pre conditions have been complied with)) are entitled to a new lease at the expiry of the contractual term unless either the landlord can prove certain statutory grounds to refuse a new lease (including material breaches of the lease and where the landlord intends to redevelop the premises) or the lease has been excluded from the security of tenure provisions of the Landlord and Tenant Act 1954. To exclude a lease from the provisions of the Act notice in a prescribed form will have to be served on you and you will have to sign a declaration to accept this exclusion. Unless negotiated with the landlord (which may have been taken into account when negotiating other terms such as rent) there is no obligation to accept that the lease is excluded from security of tenure.  

1.2.4 Fully repairing and insuring lease

Almost all leases of a complete building will require that you will be responsible for maintenance and repair of the whole of the premises. Some leases will require you to insure them, but usually only for long leases of 25 years or over where you are leasing the whole building. More commonly the landlord will insure and you will pay the costs. 

If the premises are part of a building usually you will be required to pay a service charge towards maintenance and repair of the common and structural parts of the building. There are important differences to note depending on where your lease is of the whole, or part, of a building.

Lease of Whole

Responsibility for the repair and maintenance will includes not only preserving the condition of the premises but also putting them into a good state of repair even if not in that condition upon completion of the lease.

Accordingly, a full survey (including structure) is always recommended. We can recommend surveyors to you if required. If the premises are newly constructed the landlord should have warranties from the contractors who constructed the building which the landlord should be required to transfer to you. However, warranties usually only last for 10 years from the date of practical completion of construction and are only as good as the solvency of the company standing behind them (unless insolvency is covered by indemnity insurance).  

In addition (although often only agree by landlord’s if the premises are in significant disrepair already or where the lease is only for a few years) a provision that the obligation to repair is limited to keeping the premises in no better state than as at the commencement of the lease (as evidenced by a photo graphic schedule (a schedule of condition)) is recommended.

A schedule of condition will be prepared by a surveyor, agreed by the landlord and appended to the lease.

Lease of Part

If you take a lease of part of a building the premises will commonly consist only of the internal parts and you will usually be obliged to contribute a service charge for repair and maintenance of the common and structural parts of the building (unless the rent is inclusive) 

It is often advisable for a survey to carry out a walk through inspection to ascertain any defects within the premises themselves, for which you would be liable to repair and to assess any major work required to the remainder of the building for which you may pay a proportionate part of the costs via the service charge.

A service charge is obviously an unquantified future liability and certainly for leases of a short length a service charge capped at a certain level is advisable. Often landlord’s will require provision for the cap to be increased, often annually by the increase in the retail prices index.

The proportion of the total building service charge costs that you pay can be calculated in a variety of different ways, for example by reference to the services from which you have the benefit, by reference to the square footage the premises bear to that of other lettable space in the building etc. Whatever method is used it should be fair and reasonable and you should, ideally, only pay for the services from which you benefit. Therefore, if, for example, the premises are on the ground floor you should not pay for maintenance of the lifts.       
 
Capped service charges and Schedules of Condition may not be acceptable by the landlord and much depends on the bargaining position of the parties. 

Whether you take a lease of the whole or part of a building there are also additional duties imposed by statute:

• Asbestos- unless a recently new construction, or the landlord has obtained one, you will be liable to commission and asbestos survey and manage and/or remove any located in the premises which could be costly. If the landlord has not carried out a survey you should obtain one before entering into the lease.
  
  
• Fire safety- you will be liable to commission a fire risk assessment (after carrying out any fit out works) and implement any works and procedures recommended. Again, if the landlord has not carried out a survey you should commission one before entering into the lease (but such surveyor taking account of any alterations or works you propose which could affect compliance with legislation). Fire certificates are no longer valid. 
  
  
• Disability discrimination- you must ensure that the premises are accessible not only to your disabled employees but also [anyone] [any member of the public] visiting the premises [if you provide services to the public]. The disabled include the deaf and the blind and other disabilities and not just those in wheel chairs. You may need to make alterations to the premises to comply with the act. A survey is recommended to ensure whether the premises are compliant with such requirements before lease completion. A specialist surveyor (we can recommend one to you if required) can advise further.  

1.2.5 Fit out

Most leases will require that you obtain consent for any works or fit out that you wish to carry out. Unless the lease is of a particularly long term (say 25 years or more) you are likely only to be permitted to carry out internal non structural alterations with landlord’s consent which may not be unreasonably withheld or delayed. External or structural alterations are usually prohibited to protect the landlord’s investment.

However, the right to erect demountable partitioning (for office premises) without consent should be agreed as this constitutes the majority office out. For all leases a right to install heating and air conditioning plant and connective ducting both within the premises and on the exterior and/or roof of the building should be negotiated, subject to landlord’s consent not to be unreasonably withheld or delayed. All modern leases should contain this right as you may need to increase heating or air conditioning capacity as your IT equipment and employee numbers grow.

Consent to your works will be granted by way of a license for alterations in the form of a deed. You should consider your fit out requirements and arrange for contractors to draw up plans as soon as possible for approval by the landlord prior to lease completion. Otherwise, you will not be permitted to carry out your works until landlord’s formal consent has been given which, if left until after lease completion, will eat into any rent free period or incur rent whilst waiting for approval.
You should note that the lease will normally give the landlord the right to insist that any works you carry out or alterations you make are removed when the lease comes to an end. This could be costly and you should factor this into your costings.   

1.2.6 Rent 

Advice as to the market rent for the premises should be taken from an agent which we can recommend to you. Great care should be taken when agreeing to pay a rent higher than that dictated by the market, as if the lease contains a rent review quite often, even if the rent is not increased, the rent will not be reduced and the initial rent will form a base level even if market rents drop. 

1.2.7 Rent reviews

Landlord’s will usually require that leases over 5 (or sometimes 3) years contain provisions to increase the rent in line with the market. These increases (rent reviews) can take many forms, whether a fixed annual increase, a d stepped rent or increase in line with any rise in the retail prices index. The most common form of review the upward only reviews every five years.

Rent review clauses are technical and many surveyor’s make a good living by specialising solely in advising as to their effect. Therefore, you should obtain advice from lawyer to ensure that the effect of any provisions will only entitle the landlord to an increase in line with market rent.

1.2.8 Alienation

A lease should usually at the very least allow the transfer of the lease to a third party (assignment) and, in addition underletting of whole of the premises to s subtenant in order to allow flexibility if the lease becomes surplus to requirements. This will usually be on terms requiring the landlord’s approval and veto to the assignee or subtenant (based principally on their financial status) but such approval not to be unreasonably withheld or delayed.

Numerous other preconditions will often have to be met before the landlord gives consent. Care should be taken to ensure that these conditions do no have the effect of prohibiting, or allowing the landlord to arbitrarily prohibit, assignment or subletting..       

Only the tenant named in the lease will be permitted to use and occupy the premises and therefore, if you intend for another company to use them you must insist that the lease permits this. Often the landlord will only permit occupation by a group company or another expressly named company provided that the premises are not actually sublet to them.

1.2.9 Insurance

Usually the landlord will insure the building against a list of specified risk and recover a proportionate part of the costs from you. Although the landlord will often be obliged to insure against a reasonably comprehensive range of risks, it will often be relieved of that obligation if insurance is not available in the insurance market or to the extent covered by conditions, exclusions and excesses. The effect is that if the landlord does not insure against them, you will be liable to make any damage caused (which could be costly if you take of the whole building as this could include rebuilding if completely destroyed) and the rent will continue to be payable during any period of damage even if the premises are incapable of occupation and use.

Essentially the landlord in this case is passing the risk of not being able to obtain insurance on to you. Therefore, it should be a requirement that the landlord bears the risk of “uninsured risks” so that you will not be liable for damage or rent. However, the common risk which may not be insurable in the future is terrorism.     

1.3 Ongoing Liability

On assignment of a lease dated after 1 January 1996 (where not granted pursuant to an agreement dated earlier) you should note that you will be required to stand as guarantor to the performance of the assignee until that assignee itself assigns the lease or the lease comes to an end. This called an authorised guarantee agreement.

If you have purchased a lease dated before 1 January 1996 notwithstanding that you will not be required to give such a guarantee, you will never the less be bound by contract as effectively a guarantor of any future assignee until the lease comes to an end.

On that basis, even if you assign the lease you will not divest yourself of contingent liability.

1.4 Liability When Term Comes To An End

The landlord will normally be entitled to serve on the tenant a schedule of dilapidations when the lease comes to an end, stating what disrepair will be required to be made good and what alterations you have carried out that will be required to be removed. The contents of the schedule will very much depend upon the repairing obligations, alterations provisions and other clauses in the lease.

You should employ a surveyor to negotiate the schedule on your behalf with the landlord, which again we can recommend.

Practically you should approach the landlord 3 or 4 months prior to the end of the term to ascertain what alterations the landlord requires are removed and what disrepair is required to be made good, particularly as the landlord can charge market rent for any period after the end of the term required to carry out such works.     

1.5 Rent Deposits and Guarantees

Depending on the financial strength of the company, the landlord may require additional security in the form of either directors or group company guarantees or a rent deposit. The giving of guarantees by individual directors should be resisted as this could result in those directors subsuming liability for the debts of the company in respect of the premises. Any guarantee given by two or more directors is likely to impose joint and several liability and therefore any such director could be liable for the whole debt and not just an apportioned part.    

If the financial strength of the company is such that the landlord requires additional security, this should be given by way of a rent deposit. Care should be taken to ensure that:

• the landlord is obligated to obtain a good commercial rate of interest. Otherwise there will be no obligation to obtain any particular rate; and
  
  
• the deposit deed states that the deposit sum is held on trust by the landlord and does not become the landlord’s property. Otherwise if the landlord becomes insolvent the deposit funds will be subsumed within the landlord’s finances and may be lost.

As the deposit may be a substantial part of your cash flow which would otherwise be tied up for the duration of the lease you may also wish to request that the deposit is released to you at some point in time such the third year of the term or when your net profits exceed three times the annual rent for three consecutive years or where net assets for 5 consecutive years exceed 3 time the annual rent. The landlord is likely to insist that this is subject to your not having been in breach of your lease obligations during that period. Those breaches should, at the very least, be expressed to be those that are material as otherwise any minor breach may deny the return of your deposit.

1.6 Disbursements

A new lease will be liable to Stamp Duty Land Tax which generally are payable at a rate of 1% of the aggregate lease (plus VAT) rents across the whole lease term ignoring any right to break. This must be paid within 28 days of completion or unqualified access, whichever is earlier, or penalties and interest will become payable. Failure to pay is essentially fraud. 

The lease will also need to be registered at the Land Registry if the term exceeds 7 years for which there will be a fee a fee (ranging up to £1000) depending upon various factors. Your legal advisers can advise of the tax and fee payable.

2. Commercial Freehold Premises

You should consider the following when purchasing business premises:

2.1 Survey/Valuation

It is always advisable to obtain a full structural survey of the premises which will, in any event, be a requirement of any bank if you are purchasing using bank funding. The survey will reveal any defects (that may require repair) or other matters which may affect value.

Often the bank may require that the survey is carried out by one of their panel so you should check with them whether your chosen surveyor is acceptable. The survey should also contain a valuation to ensure that you are not paying higher than market value. A copy of the survey and valuation should be sent to your legal advisers.

You will usually be required to give a deposit of 10% of the purchase price on exchange with the remaining 90% to follow on completion. It may, however in certain circumstances, be possible to negotiate a 5% deposit. You should be noted that the Bank will only usually finance a proportion of the purchase price so that you pay the remainder. Unless special arrangements are made, the Bank would not expect to finance a deposit.

2.2 New Building

If the premises have been constructed in the last ten years, it is advisable to investigate the possibility of obtaining collateral warranties from all members of the professional team who were responsible for building and designing the premises.  Otherwise latent defects caused, for example, by faulty design/materials may not have resulted in disrepair or may not be detectable at the date of purchase and may not be revealed by your survey.

With the benefit of collateral warranties you may be able to take action against the relevant contractor for compensation or remediation in the event of any defect caused by negligent design or construction. You should note that collateral warranties are of course only as good as the company standing behind them and if they become insolvent you will not be able to claim against them. You should insure that the contractors have a good level of Professional Indemnity insurance. 

2.3 Title

The company’s legal advisers will carry out a thorough investigation of title, raise enquiries of the seller and the local authority, and report to you on all matters which benefit or could adversely affect occupation and use and otherwise require capital expenditure (including planning permission for the premises and its proposed use) and generally to make certain that the premises fulfil the company’s expectations.

2.4 Funding

If the company wishes to fund its purchase, we have contacts with a wide number of Banks that we can put you in touch with if required. 

You should note that a Bank will not usually lend 100 % of the purchase price and will require that you bear at least some of the consideration. The Bank will need to see a copy of the survey or may carry out their own valuation.

The Bank will either employ their own solicitors to carry out an investigation of title on its behalf or will instruct your solicitors to act for the Bank, as well as the company, in certifying title and that there are not any adverse matters that affect value or security. In any event, you will be required to bear the costs of legal advice to the bank as part of the facility costs. 

You will be required to enter into a facility letter, which will set out the Bank’s requirements and terms of the mortgage, as to which your solicitors can advise you. The Bank will also require a first legal charge over the premises and often a debenture over all the fixed and floating assets of the company.

In certain circumstances directors’ guarantees are required which should be resisted, particularly as they are often on a joint and several basis whereby each director will be liable for all the debts of the company to the Bank. Any failure by the company to repay any sums due would result in the Bank’s right to seek recovery of all or any part of the mortgage from all or one of the directors.

2.5 Insurance

The company should insure the premises and often it will be expected to insure from the date of exchange of contracts.  It is obviously vital that the correct re-instatement value be given to the insurance company and details should be obtained from the surveyor/valuer. The risks which the preferred insurer will cover should be set out clearly and often any funder will have specific requirements. Although expensive you should consider ensuring the premises are insured against terrorism especially if situated in a major city or location.

2.6 Disbursements

Stamp Duty Land Tax and Land Registry fees are payable on the purchase.  Details of the Land Registry fees and other disbursements will be given to the company by its legal advisers but generally will not exceed £1000.  Stamp Duty Land Tax is payable as a percentage of the purchase price as follows (currently) :-

£150,000 or less - Nil
£150,001 to £250,000 - 1%
£250,001 to £500,000 - 3%
Over £500,000 - 4%

Also, it should be noted that the Bank will usually charge an arrangement fee and the company will be liable for the Bank’s Solicitors’/surveyors’ costs with regard to any loan which will be deducted from the loan sum before draw down.

2.7 VAT

VAT is usually payable on the purchase price if the building is less than three years old but otherwise will not be payable unless the seller is registered for VAT and has waived the exemption.

If you have any queries on the above please contact Stuart Darlington on 020 7468 1508.