Business Lease Transactions
Business property/lease transactions FAQ for tenants
What does a FRI lease mean?
This is short for “full repairing and insuring lease”. In essence this means that you as tenant will be responsible for the costs of insuring the premises and keeping them in repair. In the case of the insurance this is usually put in place by the landlord and he recovers the cost from you. For the repairs it depends upon whether you are talking a lease of whole or part of a building. If you are to occupy the whole building the obligation will be imposed on you to carry out the repairs. If you are to occupy only part this will usually only be the case for internal repairs but the costs of other repairs which are carried out by the landlord for example to the roof, structure and common parts will be apportioned between you and the other occupiers and recovered through a service charge which will in addition include management charges.
What is meant by “assign” and “underlet”?
An assignment is when you pass on your interest in the lease to someone who becomes the tenant is your place. An underlease is when you remain the tenant of your lease but grant a further lease to another party effectively becoming their landlord.
In either case you will usually require your landlord’s approval and your lease will set out the conditions that must be met such as evidence of the ability of the assignee or underlessee to meet the obligations that they are taking on and additional security that may be required.
Modern leases when assigned will also usually require that you as the outgoing tenant remain liable for any failure by the person you are assigning to this is known as an Authorised Guarantee Agreement or “AGA”. If they then assign the lease at a future date with the Landlord’s consent you will be released from the liabilities under the AGA.
Where you underlet the premises you remain liable to your landlord as the main lease is still in your name.
The landlord has offered me an “excluded lease” or “a lease outside the Landlord and Tenant Act” - what does this mean?
- Disrepair, persistent delay in payment of rent or substantial breach of covenant
- Suitable alternative accommodation
- Intended demolition or reconstruction by the landlord
- Intended occupation by the landlord
Normally, a business tenant in occupation at the end of a lease is, by virtue of the Landlord & Tenant Act 1954, entitled to a new lease, on terms which, if the parties are unable to agree, will be settled by the Court. There are important formalities to be observed at the time, and if they are not strictly followed, the rights are lost. There is no such right of renewal if the landlord is able to substantiate a claim that any of the following cases apply:
However, it is permissible for a landlord and tenant to agree to exclude the provisions of the Act at the outset of the lease and this is what is meant by an excluded lease. In these circumstances the lease will not continue under the act after the fixed expiry date and the landlord will be entitled to recover possession.
What taxes and land registry fees will be payable on the lease?
The current tax applying to a new lease is Stamp Duty Land Tax. The amount payable will depend upon the length of the lease and rent payable. There is as with other taxes a nil rate threshold. If you require specific advice on the likely level of the tax if any to be paid please contact one of the members of the Business Services Team.
Similarly leases currently for a term of over seven years or with more than seven years remaining at the time of an assignment will be subject to registration and the fees are calculated by reference to the rent and any premium paid. As with SDLT if you have a query please speak to one of our Business Services Team.
Do I have to pay the landlord’s costs?
This will depend entirely upon the market at the time you are taking the lease. If you are competing with someone who wants the same premises and they offer to pay the landlord’s fees then you will no doubt have to do the same. If you are assigning your lease or underletting the premises to a third party, the lease will usually already provide that you meet the landlord’s reasonable costs in these circumstances. Our advice is always to get an estimate of the fees and limit any contribution to this estimate or if you are taking a new lease agree a maximum figure you will contribute to the landlord’s fees. Be aware than an undertaking will usually be requested from us when we contact the landlord and in order to give this we will need you to have placed us in funds for the full amount of the undertaking so this may effect your cash flow plans.
What does upwards only rent review mean?
Leases which contain rent reviews usually state that they will be upward only. This means that the rent will always on a review either stay the same or be higher if market rents have gone up since the last settlement. There is a movement seeking to replace this with reviews that are upwards or downwards so they always follow market conditions. The government strongly favours this but it has not yet become common in the market as a whole. That said due to the current economic climate many landlords may find that they have to accept this in order to secure a tenant.
I will need to carry out works at the premises before I can trade from them - how will this be dealt with?
Firstly as with any planned alterations you will need to see whether or not you need the landlord’s consent. If this is the case you will need to let him have full details of your plans as soon as possible. At the same time you will need to establish what if any statutory consents and approvals are needed. If you are taking a new lease you should make sure that the grant of consent is part and parcel of you taking the new lease and as such no further costs are to be paid. If you have an existing lease you can expect to be asked to pay the landlords and his advisors fees for the consent. Alterations are usually then recorded in a formal consent called a Licence to Alter which we as your solicitor would agree with the landlord’s solicitor. This is likely to require you to reinstate the premises back to their former state if required by the Landlord at the end of the Lease and if this is inappropriate for any reason make this clear to the Landlord at the outset. Also be aware that if the landlord offers to contribute to the cost of the works he will in return expect them to be rentalised the next time the rent is reviewed under the current lease or any renewal.
The landlord has asked for a rent deposit - what does this mean?
A rent deposit is the means by which a landlord secures a sum of money paid by you at the outset against a future tenant default in paying rent or any other debts during the lease. Normally this is held by or on behalf of the landlord and you should be aware the deposit accounts of this nature as they must be available on demand attract very little by way of interest so if you do not default at any time and become entitled to the monies back there is unlikely to be the same return on them that you could have expected if you were managing the money yourself. The money will also normally be held until you are no longer the tenant and possibly longer if you have given a guarantee for an assignee by way of an Authorised Guarantee Agreement.
The landlord has asked for a guarantor - what does this mean?
Again this is a means by which the landlord guarantees the tenant’s performance by having a third party liable for any default. If you are considering being a guarantor you should take legal advice and unless you are involved in the business on a day to day basis consider whether or not you will take this obligation on. The guarantee document is unlikely to be limited unlike with a bank when they will often agree in advance a maximum liability.
Can I get out of the lease early?
Yes but only in limited circumstances.
At the outset you may agree that a break right be included in the lease subject to specific notice and compliance requirements. The terms of the break clause should be looked at with us to ensure any pre-conditions of the break can be complied with otherwise a pre-condition if not satisfied may render the break ineffective.
You can agree terms with the landlord for an earlier determination of the lease. The market and parties needs will determine the cost to you or the landlord of this. Again the terms should be properly recorded to ensure that any break is a clean break and you walk away without any residual liability.
You can assign or underlet the premises if permitted by the landlord to a third party. This will not be a clean break as some liability will remain with you but again this may be the best method of dealing with your requirements and we will aim to see that you receive as much protection as possible.
If I sell my business and lease will I still be liable for anything in the future?
If the lease predates 1st January 1996 then you will continue to be liable for a subsequent tenants’ default throughout the lease and any holding over period. For a lease granted after 1st January 1996 liability will rest with you if required by the landlord under an Authorised Guarantee Agreement. This means that you guarantee the person you sell to until that person sells the lease on again providing that has been done with the landlord’s consent in accordance with the lease terms. In every case however the landlord must have served notice on you of the potential claim within six months of the default. If he fails to do this he will lose the right to claim against you. If a claim is made and you make a payment to the landlord you then may request that he grant you an intervening lease which makes you the landlord of your assignee and able to take enforcement action against him. We would advise you to speak to us should any claim be made by the landlord against you so that we can advise you of your liabilities and the remedies available to you to protect your position.
I have had a notice from the landlord offering me a new lease - what do I do now?
Before you do anything contact us and bring a copy of your lease and the notice you have received from the landlord. We will be able to confirm whether or not the notice is valid and should you wish to take a new lease, advise you of the procedures you need to follow.
I have had a notice from the landlord telling me to vacate my premises - what do I do now?
Again come and see us as soon as you can. The options available to you will depend on what your intentions are and the reasons why the notice has been served assuming after we have seen it that it is a valid notice. Do not ignore these notices or letters as you may inadvertently lose your rights to challenge the landlord’s notice.
I have had a notice from the landlord putting up my rent - what do I do now?
Again come and see us as soon as you can. Leases vary as to whether notices and counter notices are required and the sooner we can advise you the better, to avoid you inadvertently accepting a rent higher than the market dictates. Your will also need to instruct a rent review expert to negotiate the rent. We work with a number of local surveyors which we can recommend to you.
My lease is coming to an end - what do I need to do?
This will depend on whether the lease you have is a lease protected by the Landlord and Tenant Act 1954 or not and whether or not you want to stay in the premises. We would always advise that you come and see us as early as possible before it expires so that we can look at the lease and discuss your plans and the options available to you in detail.