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Business leases

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NOTE: This page is for general information - Marshalls do not undertake commercial lease renewal, rent review or commercial valuation work.

It's a big financial commitment taking on a business lease. Make sure it meets your needs and you understand all its implications before signing on the dotted line The guide 'A code of practice for commercial leases in England and Wales' can help landlords and tenants to negotiate fairer leases. But leases are complex and few people outside the property and legal worlds will understand all the details. So call in the professionals - your chartered surveyor and solicitor. The combination of the two viewpoints makes all the difference.

A lease is a binding legal contract that sets out the terms and conditions of the tenancy agreement between landlord and tenant. It defines the rights and duties of both people. It is enforceable - you cannot simply walk away from a lease. The law also defines certain aspects of the relationship between landlords and tenants.

It is not always a simple matter of a tenant taking a lease direct from the property owner (the freeholder). Take the following situation: An investor owns the freehold of the building A tenant takes a lease from the freeholder A second tenant later takes on this lease from the original tenant, becoming the assignee and assuming the responsibilities of the original lease The assignee later grants a sub-lease over surplus parts of the building to a sub-tenant. In practice the chain may be far more complex than this. Needless to say, nobody down the chain can grant a lease longer than their own. As a prospective tenant, you might be negotiating a new lease with the freeholder. On the other hand you might be entering the chain lower down and taking an assignment of an existing lease, or perhaps a sub-lease. With the new lease you can negotiate the terms to match your needs (though you will not necessarily get everything you want!). With an existing lease you will be bound by existing conditions and you have decide before signing whether you can live with these or not.

No. It is up to the landlord and tenant to agree the terms. However, there are certain legal matters that will crop up in almost all leases and the Law Society produces templates leases for various types of tenancy. The landlord and their advisers will probably have a clear idea of the form of lease they would like and the main conditions. You, as prospective tenant, may want to negotiate for changes on specific points. Your bargaining position will depend on several things, including the state of the property market at the time. This is where your chartered surveyor's expertise will be invaluable.

Again, this is up to you to negotiate. Longer leases often have terms allowing for the rent to be adjusted at intervals of, say, three to five years. The wording of this rent review clause is very important - get it even slightly wrong and it could cost thousands. However, the length of the lease does not necessarily limit how long you stay in the property. Most business tenants have security of tenure under the Landlord and Tenant Act 1954, which gives them the right to have a new lease when the existing lease ends, subject to certain exceptions. Make sure you understand your rights.

Not all leases include this security. You must be extremely careful giving up your security of tenure. And even if your tenancy is protected under the Act, you are not guaranteed a new lease when the current one ends. The landlord might oppose it for some legitimate reason, for example, because they want to move in themselves or redevelop the building. Or they claim you had consistently breached the terms of the old lease. For more information on security of tenure and lease renewals contact your Chartered Surveyor or solicitor.

You probably won't be allowed to make any structural changes or building extensions but may be able to make internal ones - such as partitioning - with the landlord's consent. But you may have to remove any changes you have made internally and return the property to their original state at the end of the lease.

It's usually your responsibility to look after inside decoration and repairs and possibly the outside ones too. So if you are planning to lease a building that is already in disrepair get your Chartered Surveyor to survey the property first. They will let you know how much needs doing. Plus, towards the end of the lease the landlord may serve a 'schedule of dilapidations' notice on you to carry out any repairs listed in the lease. Since there is often argument over this point, professional advice is essential and if possible a schedule of condition should be drawn and agreed, prior to the lease.

Normally, you pay the premiums in one form or another, even if your landlord arranges the insurance, which often covers loss of rent. Most tenants will also want to insure against disruption and loss of profits should the building become unusable following a fire or other accident.

You will inevitably be subject to some limits under planning permission rules. You will not be able to use a high street shop as an engineering works! The lease may also impose further limits - to keep a balance of tenants in a shopping centre, for example. A lease with strict use conditions may be difficult to assign.

The landlord, you and your advisers agree the rent before the lease is signed. However, you can review this at intervals. The expertise and market knowledge of your chartered surveyor is vital here, as they can advise you on what figure is reasonable. And sometimes it may be possible to negotiate some form of rent-free period at the beginning of a lease. But you cannot review the rent by itself without considering the other terms of lease. You should, for example, expect to pay more if the landlord takes responsibility for repairs than you would do if you were responsible for them.

If your business is a very young or small one, the landlord may ask for some kind of guarantee for the rent and the other terms of the lease. If your landlord asks you for a personal guarantee, be careful. If your company goes bust, the landlord could have a claim on your home and other personal belongings. You also need to make sure any guarantees would end if the lease was then assigned.

Most leases include a clause of rent reviews in the future. This is usually every three to five years during the length of the lease, possibly in an 'upward only' direction. For a guide to rent reviews see the publication 'A code of practice for commercial leases in England and Wales'. However, following cross-industry agreement, landlords have been recommended to offer tenants alternatives to upward only reviews. Your chartered surveyor can advise you on the implications of the landlord's proposed rent reviews and whether there may be scope for negotiation.

Ideally, by discussion and negotiation. But you can't always avoid serious differences, particularly on issues like market rent levels at the review point. So leases normally say in advance what happens when disagreements occur on certain key points. Without other terms, the ultimate recourse is to the court - both time and money consuming. But the lease may also say that disputes can be referred to an arbitrator or to an independent expert.

If your business is in part of a larger building, the landlord may charge you part of the cost for the services they supply to the whole building: maintenance of common parts, decoration and maintenance for the outside of the building and the like. This is the 'service charge'. You need to understand how these charges are calculated and how much they are before signing the lease.

You as the tenant pay the business rates. Occasionally, however, the landlord will pay and pass on the cost to the tenant, perhaps in the service charge. The lease should make clear where the responsibility lies.

Yes you can either 'assign' the lease to another tenant who takes over responsibility for paying rent to the landlord. Or 'sub-let' to another tenant, from whom you in turn collect rent. However, your lease will probably limit or impose conditions on either of these. You need to understand these limits fully before you sign the lease. Some leases include a 'break clause', which gives the landlord or you (or both) the right to walk away from the lease at a specific point. For example, you might sign a 15 year lease but with the option to break the lease after 10 years. There might or might not be a penalty for this - again check the details of the lease. Assignment and sub-letting terms can effect your future flexibility. Make sure your chartered surveyor or solicitor explains exactly what you are being asked to agree to, and its possible implications (see the section sales, assignments and sub-letting).

Before 1996, if you signed a lease you stayed ultimately responsible for paying the rent and following the other terms until it ended, even if you passed the lease to somebody else, who in turn might pass it on. This was known as 'privity of contract'. It meant the landlord could come back to you, perhaps many years later, to pay the rent and fulfil the other terms of the lease if one of the next tenants down the line went bust. After 1 January 1996 this 'privity of contract' as it applied to the tenant, ended. However, most landlords will ask you, as tenant, to sign an 'authorised guarantee agreement'. This means you remain responsible for the lease if the person you passed it to defaults. But you are not responsible if following tenants default. But remember, if you take on a lease that was originally begun before 1996, the 'privity of contract' still applies. Occupation under license Young and start-up businesses need every spare penny to plough into the business plan. So rather than take out a lease on a property why not consider occupying your premises under a licence? Property owners sometimes find it convenient to grant a licence, partly because the occupier will not qualify for 'security of tenure'. Licences are usually much shorter and do not need the same level of financial commitment, thus offering more flexibility. But licences need to be drawn up very carefully. Otherwise the law might read them as a lease. So it is vital to take advice from a solicitor and a chartered surveyor before signing a licence, either as occupier or licensor.

In this context a licence is technically a 'licence to occupy'. The 'licensee' - the business that occupies space under a licence - does not have a tenancy so cannot be described as a tenant. Nor do they pay rent. Technically, the payment it makes for the use of the space is a 'licence fee'. A licence needs to be written carefully so it does not become a lease and therefore come under the Landlord and Tenant Act 1954.

These vary greatly with your circumstances. The licence fee (the equivalent of rent) might be payable monthly in advance or even weekly. The 'licensor' (the equivalent of the landlord) may want the occupier to leave after one month's notice. The occupier may also be able to give one month's quitting notice. Various services may be provided as part of the licence arrangement. What are the advantages? If you are without much financial backing you may find it easier to get a licence than a lease. Usually, you need to pay a deposit equivalent to one month's licence fee, plus one month's licence fee in advance. If you take a licence you will also find it much simpler and cheaper to get out if your business plans do not work out and you need to leave.

As occupier you have no 'security of tenure' You might lose your premises at quite short notice. So it can be risky to invest in decorating or furnishing the space to fit your needs You are at the mercy of the licensor. Especially if they decide you must sign a full lease to continue using the space You may also find the licensor has access to the premises you occupy at any time Because a licence appears simpler than a lease there may be a temptation to ignore the usual precautions. Do not grant or accept a licence without consulting your solicitor and chartered surveyor.

It varies a great deal. Old multi-storey warehouse buildings are sometimes refurbished as small office units or even as individual rooms that might be available under a licence. Older industrial buildings - 'sheds' - are sometimes occupied under licence, as are seasonal shops. Regional development agencies may make 'starter' office units available under licence and perhaps provide communal photocopiers, secretarial assistance and the like. Some businesses, which own or lease the buildings they occupy, find themselves with surplus space and often make sections of the building or individual rooms available under licence.