Commercial Leasing - an Introduction (Ken Gray, Judith Vandecasteele and Allison MacAffer discuss the basics of commercial lease transactions and summarise the services that we offer)
Commercial letting is a very important part of our business, and is one of the property areas which has probably been least affected by the economic downturn.
For many companies, trusts, pension schemes and individuals, investing in and renting out commercial properties continues to be big business.
Most businesses do not own their premises. Whilst individuals may prefer to own their home, paying a monthly mortgage instead of a rent, many businesses do not wish to have large amounts of capital tied up in bricks and mortar, and may prefer the budgetary certainty that renting can provide. Renting also gives tenants a greater degree of flexibility, in the event that the business turns out to be less successful than they had anticipated.
Many of the shops, offices, restaurants, bars and cafes in Fife are rented. Murray Donald Drummond Cook LLP can assist Landlords and Tenants in reaching agreed terms and having a successful working relationship.
Commercial Leases differ in many ways from residential tenancies.
For a start, they are often for a longer term of 5, 10 or 20 years.
They are also not regulated in the same way that Assured Tenancies or Short Assured Tenancies are. Whilst the landlord of a house has various obligations to keep the house in a habitable condition, in a commercial lease, while the landlord has the same duties at Common law, that onus is normally reversed so it rests on the tenant.
As well as paying rent, the tenant will generally be expected to pay for any maintenance to the premises, as well as a proportion of the costs of any repairs done to common parts of the building. The landlord may recover these charges by way of a service charge, which can cover anything from window cleaning to employing security guards, cleaners and receptionists.
In addition, although the landlord will wish to insure the building/premises, it will almost always recover the cost of the insurance premiums from the tenant.
As the repairing obligations can be quite onerous, tenants will often try to restrict these as much as possible, and it is not unusual for a tenant to have a schedule of condition produced at the outset. This is a report and series of photographs usually prepared by a surveyor highlighting any defects in the building and showing the state it was in when the tenant took entry. The tenant will then restrict its repairing obligation so that it need not put the premises into any better condition than as shown in the schedule.
As there is less prescriptive legislation governing commercial leases and much of the law in the area is governed by case law or common law, there is a lot more scope for negotiation between the parties.
The main terms of the lease are commonly set out in a separate document, called the Heads of Terms. This specifies the parties, the annual rent, the date of entry, and the length of the lease and other key terms. The details will then be agreed in the lease itself and in the contract for lease.
Almost all commercial leases over a certain duration contain (or at least should contain) a mechanism for rent review. This generally allows the landlord to increase the rent every 3 or 5 years, so that it is in line with the open market rents but other formulae are possible.
Sometimes a landlord will allow a tenant a rent-free period following the date of entry. This is usually to allow the tenant to fit-out the property, making it suitable for their desired use, and the rent-free period will usually cover the period before the tenant can begin trading.
In some cases, a tenant may pay a premium to the landlord in return for the lease. This is in effect buying the right to the lease, and it will depend on many factors such as the nature of goodwill in the business and the commercial attributes of the unit to be let.
Another example of a time where a "price" is paid is when someone is buying the tenant's interest in an existing lease. This type of transaction is similar to a normal property purchase, but instead of a disposition, there is an assignation of the lease.
Both landlord and tenant will need to agree the permitted use of the premises but the local authority also have a role here as they exercise control of the use of commercial property through the planning use classes legislation. If a use is established, planning permission may be required to change this and we can provide advice and assistance in this regard.
Prospective tenants will also likely be interested in finding out what the rateable value and other likely costs will be. The rates information is generally available online, but it is worth remembering that some small businesses can get rates relief.
The landlord's solicitor will usually prepare the lease. Given that most of the key terms, such as rent, duration and date of entry will already have been agreed, it is for the solicitors to negotiate the exact terms. The most contentious provisions usually relate to the repairing obligations, especially where there is a history of problems or issues or some obvious defects. All leases are unique to their circumstances and parties however, and negotiations are often therefore a reflection of the state of the premises and the respective bargaining strengths of the parties. It is almost always essential to take proper professional legal advice and to steer well clear of templates or styles produced by say breweries or other non-legal agencies. These ‘one-size-fits all’ leases potentially contain many pitfalls and dangers for the unsuspecting and unwary.
As the tenant is usually assuming all of the repairing duties and obligations in respect of the property they must treat the lease as if it were a purchase and examine the landlord's title, firstly to make sure they are indeed negotiating with the true owner of the subjects but also to ensure there are no restrictive or unduly onerous title conditions. The title examination will also disclose any lenders from whom consent to the lease might be required.
The principle that the landlord selected his tenant carefully and that his contract with that tenant is personal is a strong element of commercial leasing - this is known as delectus personae (meaning simply - choice of a particular person). A landlord may often therefore want to restrict what is known as alienation (sub-letting or assignation) without his consent to avoid finding himself with tenants or sub-tenants that devalue his asset or other neighbouring assets or prove to be a nuisance or unreliable.
We can offer commercial landlords a one-stop shop for the marketing, letting and on-going management of their properties and can also assist and guide commercial tenants through the legal process.
Key contacts Ken Gray, Judith Vandecasteele and Allison MacAffer