A Guide to Commercial Leases. Part 4

In this, the final article in our Guide to Commercial Leases series, we explain three final but important areas to be considered when negotiating a business lease, namely alienation, alteration and repairs.

Alienation of a commercial lease

Alienation of a commercial lease generally refers to a tenant transferring the lease to a third party either by assigning the entire lease or by subletting part of the property.

An assignment of a commercial lease refers to the sale by a tenant of their lease. The landlord’s consent to an assignment will normally be required and the landlord may wish to impose some conditions in the lease so that they have an element of control such as requiring the outgoing tenant to provide an authorised guarantee agreement, guaranteeing the new tenant will comply with the obligations in the lease.

Subletting allows the tenant to grant a sublease of either the whole or part of the property to a new tenant. Similarly, a commercial lease will normally include conditions about sub letting such as the existing tenant giving a guarantee for the sub-tenant. A sublease must be for a term shorter than the main lease and should include most of the terms of the head lease. The head lease will set out all the conditions which must be complied with and often prescribes the form the underlease should take.

A lease normally prohibits the tenant from sharing occupation of the property except with the landlord’s consent. If permission is granted the lease should specify that no landlord and tenant relationship is created by the sharing of the property.

Charging

A commercial tenant may want the right to grant a charge over its leasehold interest as security when raising finance. This will need to be carefully negotiated weighing up the interests of both the landlord and tenant.

Alienation covenants

An alienation covenant in a business lease determines what the tenant can and cannot do. It may prohibit a tenant from assigning, underletting, or charging the property, restrict a tenant’s ability to part with possession of the property or give the tenant permission to let others use the property under certain conditions.

Alterations

It is common in a commercial lease for a tenant to have to obtain the landlord’s consent before making any alterations or improvements to the premises that may impact the structure or functionality of the building. It is important to note the difference between ‘structural alterations’ and ‘non-structural alterations’. Non-structural alterations (such as partition walls) are normally permitted but subject to the landlord’s permission. In such circumstances, the tenant will need to provide details of the proposed alterations and a licence will be agreed between the parties that sets out the nature of the alterations, costs, standard of work, an obligation to reinstate the property at the end of the lease and how to address the alterations as part of a rent review.

Structural alterations could include changes to the internal and external structural walls, changes to the front of the premises or adding a floor or mezzanine. These are not generally permitted under the lease although a tenant can still request to make such changes. The landlord does not however have to agree.

Therefore, it is helpful to address alterations when negotiating the lease to try and achieve a level of flexibility for the tenant to allow them to adapt the property to meet their business needs without too much difficulty.

Repair and maintenance

As part of the preparatory steps, a tenant may have visited the premises which is subject of the proposed lease and may also have a surveyor’s report. In agreeing the terms of the lease, and in addition to rent and service charge costs, the parties will also need to negotiate the responsibility for ongoing repairs. Often, but not always, the landlord is responsible for major structural repairs, while the tenant takes care of routine maintenance. However, if the property is standalone (rather than a multi-let), then tenant is more likely to be responsible for repair and maintenance of the whole building, including its structure.

The type or repair and maintenance and the standard to which it must be done will depend on the nature of the property at the grant of the lease. What’s more, often, a proportion of repair costs incurred by the landlord are covered by the service charge.

In general, tenants will be expected to maintain the premises to a good standard, perform routine maintenance, comply with all building and health and safety regulations, repair any internal damage and replace any damage caused to fixtures or equipment, as well as decorate the property at the end of the lease.

A tenant is usually required to report any property damage to the landlord and allow the landlord access to the premises for inspection and to conduct any necessary repairs.

If the tenant has not carried out repairs in accordance with the terms of the lease, the landlord will be entitled to serve a notice requiring them to do so within a reasonable period.

Schedule of Condition

At the outset, the parties should agree what is known as a Schedule of Condition (or a defect report) which sets out the condition of the property at the time the parties enter into the lease agreement. The tenant then may wish to limit their repairing obligation to ensuring the property is left as found. Failure to do this could mean, where there is a covenant to repair in the lease, that the tenant has to leave the property in a better state of repair than it was in when the tenant entered the lease. A Schedule of Condition needs to be meticulously drafted as anything not dealt with on the schedule is likely to be the tenant’s responsibility.  

Schedule of Dilapidations

At the end of a lease, the landlord will inspect the property and may issue a Schedule of Dilapidations. This is a list of items of disrepair. The landlord will often also estimate the cost of carrying out the repairs, with a view to agreeing a payment in lieu of repairs.

New builds

If the property is a new building, the parties should consider any defects due to the original construction of the property. The tenant may seek to exclude any damage resulting from such defects from their obligation to repair in the business lease. Alternatively, the tenant may seek a warranty from the developer.

Subsequent requirements

Once the business lease has been agreed and signed, there are various other legal requirements. For a lease of seven years or more, it must be registered at HM Land Registry. It may also be necessary to register an interest against a property at HM Land Registry. There may be  Stamp Duty Land Tax to be paid and this must be done within 14 days of completion.

It is important to stress, that this series of articles about commercial leases is designed to highlight and explain some of the main issues that need to be considered when entering into a commercial lease. It should not be treated as a substitute for seeking professional advice and assistance. For an overview of commercial leases, you can find more information here: A Guide to Commercial Leases. An overview.

You can find the other articles in this series here:

• Identifying a suitable property, due diligence, understanding security of tenure and break clauses.
• Deposits and security, rent, service charges and insurance.

If you have any issues arising from a commercial or business lease, please get in touch.

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