What are the fundamental elements of a commercial property lease?
A commercial property lease is a legally binding contract between a landlord and a tenant that grants the tenant the right to use the landlord's property for a specified period in exchange for rent. The lease should be in writing and must include certain essential terms, such as the rent amount, the lease length or ‘term’, and the use of the property.
Do landlords hold the balance of power?
Entering into a commercial lease can be confusing and stressful, and typically the landlord has more experience in such dealings than the tenant. This position of authority often leads to the landlord and their agents to apply undue pressure which can invariably lead to agreeing to terms with the landlord without giving substantive thought and consideration to the implications. Typically, the balance of power favours the landlord when it comes to commercial leases, not only in the form of the lease itself but also in the procedures that follow.
Do market conditions make a difference?
Landlords don’t always have the advantage, particularly when the commercial property market conditions in the United Kingdom, as now, favour prospective tenants. Often, tenants jeopardise their negotiating position right at the start of a proposed transaction by not negotiating terms beyond just the annual rent or the length of the lease.
What are Heads of Terms?
Heads of Terms are a non-binding document that outlines the key terms of a commercial property lease. They are often used as a starting point for negotiations between a landlord and a tenant, and they can help to speed up the lease process.
For further reading on Heads of Terms please consider our 3 part Newsletter -
Part 1 – Renting Commercial Property – Heads of Terms – The Basics (Part 1)
Part 2 – Renting Commercial Property – Heads of Terms – The Basics (Part 2)
Part 3 – Renting Commercial Property – Heads of Terms – The Basics (Part 3)
What are the key elements of Heads of Terms to negotiate?
Heads of Terms are not contractually binding. However, landlords’ agents and their legal representatives often treat them as such, making it difficult for the tenant to argue against such terms later in the legal process, even if the tenant’s proposals are reasonable. Therefore, it is imperative that tenants are aware of some key terms that they should seek to negotiate from the outset:
- Rent-Free Periods
Often there will be a requirement for fit-out works to be carried out at the property. Consequently, a rent-free period is often agreed to reflect this need and whilst there is no market standard, it is quite common for 3-6 month rent-free periods to be agreed.
- Tenant-Only Break Right
During periods of economic uncertainty, depending on the nature of the business, being committed to a long-term commercial lease might not be advisable. One way to limit the liability of a tenant under a commercial lease is to agree on a break clause that will allow the tenant (and only the tenant if it is a ‘tenant-only’ break clause) to terminate the lease earlier than its contractual end date. The break date will need to be agreed upon in negotiations and the tenant should try and ensure that there are no conditions attached to the break right.
However, a condition that the tenant serves a break notice a few months before the break date is often required. Typically, six months prior written notice is required to be served by the tenant.
- Schedule of Condition
Commercial leases usually require a tenant to return the leased property to the landlord at the end of the commercial lease term in the same condition as when they entered into the lease. Often disagreements arise between landlords and tenants because one party disputes that the condition of the property prior to them entering into the lease does not reflect the other party’s recollection of its condition.
Therefore, we advise that a Schedule of Condition be drawn up which is a photographic schedule that records the state and condition of the property. The Schedule of Condition forms part of the lease. The sooner the tenant mentions this requirement the better because the landlord will be more inclined to equally share the costs of the Schedule of Condition being commissioned.
- Alterations
Any alterations a tenant wishes to carry out at the property will require the landlord’s prior written consent. Structural and external alterations are usually not allowed but internal non-structural alterations are permitted, subject to the landlord’s consent. A tenant should try and seek to negotiate a condition that alterations for the installation of demountable partitioning, repainting, and decorating the internal façade of the property do not require the landlord’s consent.
- Caps
Service Charges and Repair provisions can cause a tenant frustration as these are not fixed costs that are easily ascertainable, which can make budgeting and budget approvals for this expenditure difficult to manage.
An option for tenants is to negotiate with the landlord to set a cap on these costs. Care will need to be taken as to what is included within the cap agreed and what is not. Utility charges for instance have historically been included within Service Charge Caps, but with the cost of rising energy prices, landlords have more recently been seen to be excluding such costs from any Service Charge Cap.
How 3CS can help
We have highlighted just a few of the key points for negotiation that feature in Heads of Terms. No two cases are the same and there are many facets to consider in a commercial lease transaction which may be daunting to some tenants, particularly international clients.
Our team of experienced property lawyers can assist prospective tenants with all legal aspects of commercial property leases. If you need help or further information, please get in touch with your usual 3CS contact.
