Property of one sort or another represents a significant balance sheet item for most companies, and the majority of companies lease their premises. The lease regulates the relationship between the Landlord and the Tenant, and is (usually) a long and jargon-filled document. Understanding the terms of the lease is therefore critical, but is often not given the importance it deserves. If you lease your premises, it is worth taking the trouble to understand the basics. It could save you time and money in the long run.
Often called “the demise”, this means the precise extent of the property that is subject to the lease. It is often also illustrated on a plan attached to the lease, but the words of the lease are also important, as this will describe what parts of the property are and are not included. This will be particularly relevant when it comes to repairing obligations and dilapidations claims (see below). It is important to check that the plan and the words accurately describe the premises-mistakes are made.
The rent is normally paid quarterly through the year, but may be monthly. Most if not all leases provide for “forfeiture” in the event that rent is unpaid for more than 14 days after it is due, whether the Landlord calls for it or not. Forfeiture is a radical and important legal remedy available to the Landlord, discussed in more detail below. There will also be a provision for the payment of interest if the rent is paid late.
In addition to the rent for the property itself, often the lease will define other payments to the Landlord as being “rent” (particularly insurance premiums), and if these sums are not paid the Landlord can use the remedies available for rent arrears (including forfeiture) even if the rent itself has been paid.
Over the period of a lease (which may be 10 years or longer), inflation and the economic climate will change. To compensate for this, most leases will include a provision which entitles the Landlord to increase the rent to adjust for market forces. This normally takes the form of a long schedule to the lease which defines the procedure for rent review, and also what assumptions the Landlord’s surveyor must make when calculating the market rent. Commonly rent reviews are “upwards only”, that is, even if the market has declined the rent cannot be reduced.
The demise of the lease will define precisely what parts of the property the Tenant is responsible for. The lease will also define what the Tenant’s responsibilities are. Normally this will be restricted to keeping the property in the same condition that it was when the Tenant took over the property, so it is important to be able to demonstrate what this condition was (by survey and photographs). Some leases impose more stringent obligations, for instance to put and keep in repair. This means that the Tenant is required to put the property into the same condition it was at the outset of the lease, which If the lease was assigned to the Tenant some time after it commenced could be very different.
Term and termination
The length of a lease is known as the term. The parties to a lease may choose to agree how long it should last, and a common term for a commercial lease is 9 years, with rent reviews every 3 years. Neither the Landlord nor the Tenant can terminate the lease before the expiry of the term unless the other party consents to it, or there is a breach of the lease allowing one of the parties to do so. If the parties do not agree a term then it simply runs on until it is terminated by one of the parties by serving a special type of notice.
Commercial leases that last longer than 6 months have the protection of The Landlord and Tenant Act which requires specific notices to be served on the other party if they wish to terminate the lease or to request a new one, and there are strict time limits that must be complied with.
A business Tenant will be entitled to a new lease if the landlord terminates it, unless the Tenant has breached the lease (by late payment of rent for instance) and the terms of the new lease cannot be less favourable than the old one. So, a market rent can be charged, but it cannot for instance impose more restrictive repairing obligations.
If a notice under the 1954 Act is served, it is important to act quickly and to take professional advice. The Landlord can however seek possession of the property at the end of the lease if it wishes to redevelop the property but the Tenant may be entitled to compensation.
If the tenancy is brought to an end, for one reason or another, the Landlord can require the Tenant to either comply with the terms of the repairing obligations imposed by the lease, or can bring a claim for damages for the amount it will cost the Landlord to do so. These claims can be substantial if, for instance, a roof needs repairing.
If the Tenant has not complied with the terms of the lease, and the lease reserves the Landlord’s right to do it, the lease can be terminated by forfeiture. This is an ancient remedy (and has been criticised by the Courts as being potentially in breach of the Human Rights Act 1998). It allows the Landlord to bring the lease to an end simply by the Landlord (or his agent) physically going onto the property (“peaceful re-entry”), or by bringing proceedings in the courts. No notice is required if there are arrears, but for other breaches of the lease (such as failure to repair) the Landlord must serve a notice under section 146 of the Law of Property Act 1925. If the Tenant wishes to protect its position, it may need to apply immediately to the Court for relief from forfeiture. The Court may grant relief, but usually on strict terms including payment of the arrears and the Landlord’s legal costs.
This note is not intended to be a definitive guide to the law. For more information contact David Vaughan-Birch.