Issues to Consider When Entering into a Commercial Lease  

Whether driven by taking on more employees, an increase in production or expanding into a new location, moving into new premises is usually an exciting time for a business. Whilst taking on a commercial lease is part and parcel of the course of business life, it doesn’t mean that it should be considered low-risk. In fact, commercial leases can be extremely onerous – not only in the length of commitment usually required but also in the Tenant’s covenants (obligations) that come as part of the agreement.

As an area of practice which we, as a firm, specialise in, we thought it would be useful to put together a list of perhaps the most serious obligations.

  1. Repair Obligations and Ingoing Schedule of Condition

When signing a commercial lease, businesses will usually become liable for managing and covering the cost of maintenance and repair works to the property.  Unfortunately, not all businesses realise the extent of their obligations, with some assuming that repair work will be covered by the landlord.  In order to ensure tenants appreciate what they are potentially letting themselves in for, it is important to look carefully the repair covenant. In the event that the Landlord inists on an Full Repair and Insure (FRI) Lease, then when acting for Tenant we would always recommend having a Schedule of Condition prepared by a Chartered Surveyor to limit the extent of the repair obligation to the standard of repair at the time of entering into the Lease. As well as assessing the current state of repair of the property, a Surveyor can also advise on any looming issues and the potential cost of addressing these later on.

 

  1. Break Conditions and Fulfilment

A break clause is a provision in a lease which enables one or both parties to the lease to bring the lease to an end early. These are usually fixed on a certain date (or dates) during the term of the lease, or may also be exercisable after a specified date on a rolling basis throughout the term.

In order for a break clause to be validly exercised, there will usually be a set of pre-conditions which Tenants must comply with. Before signing a lease, tenants should seek legal advice in order to see these pre-conditions are reasonable and to fully understand how they can achieve a smooth break and avoid the trap of breaching the conditions of the break clause.

 

  1. Landlord and Tenant Act 1954 and Security of Tenure

The Landlord and Tenant Act 1954 governs the rights and obligations of landlords and tenants of premises which are occupied for business purposes at the end of the Term. Of particular note, this legislation sets out that a business tenant has a right both to remain in occupation of the premises and to a new lease of the premises on substantially the same terms at the end of the current term.  Although this legislation goes some way to protecting tenants, there are a number of instances in which the rules do not apply – for example, if a landlord requires the property back for development purposes or for their own use.

In some instances, the security of tenure conferred by the Act can be excluded from a lease by agreement at the outset and in such cases, it’s important that tenants understand the implications this may have in the longer term and for Landlord’s that the prescribed procedure is followed to the letter.

O’Donnell Solicitors has a great deal of experience representing clients in drafting and negotiating leases for commercial premises. We pride ourselves on providing commercially astute, straight-talking advice.

To access our Commercial Property services please contact James O’Donnell on 01457 761 320 or email James O’Donnell at [email protected] or a member of his team.