A QUICK GUIDE TO… COMMERCIAL LEASES
What is a lease?
A commercial lease is a contract by which the intending occupiers, the tenants, are allowed to occupy someone else’s commercial property, the landlords, for a limited period. Leases are legal documents which try to regulate the relationship between landlords and tenants as carefully as possible. Commercial leases are generally drafted by, and very much to the advantage, of landlords - meaning tenants should take great care before entering into such leases.
Full Repairing & Insuring Lease
Most commercial leases are of a particular type – a Full Repairing & Insuring lease (or FRI lease for short). Landlords prefer this type of lease because (a) tenants are responsible for all repairs for the duration of the lease and (b) tenants pay insurance and other costs connected with the property.
The following is a summary of the main points in a standard FRI lease.
Duration
The length of time an FRI lease lasts will vary depending on the circumstances. A typical FRI lease will run for anywhere between a few months and 15 years. The average length of lease is probably now only around 10 years. Tenants would often also expect the right to end the lease after, typically, the first 5 years.
Repairing obligation
Under an FRI lease, tenants will be responsible for the repair and maintenance of the property. Tenants usually must repair and maintain the property to the highest of standards – very possibly higher than the state of repair of the property at the start of the lease. For this reason, tenants should always try and negotiate restrictions to their repairs obligation.
Service charge
If an FRI lease applies only to part of a building, the repairs are usually carried out by landlords but they will seek to recover from the tenants the cost of repairs by way of a service charge. Once again, the service charge must be carefully negotiated and drafted to ensure that the tenants’ liabilities are appropriate for the property being leased.
Insuring obligation
Insurance provisions under an FRI lease vary, depending on the type of premises being leased. In the majority of cases, the landlords insure the property with the tenants repaying the premium to the landlords. The landlords will usually insist on insuring the property as they are then in control and can ensure that the property is properly insured at all times. If, unusually, the tenants are to insure the premises the lease will contain provisions to ensure that the tenants insure the property to the level required by the landlord.
In both situations the lease should say what risks will be insured against. The insured risks are important as they relate directly to the repairing obligation. If any damage is caused which is not an insured risk the tenants will have to repair or reinstate the property. Likewise, if the tenants breach the insurance policy, they will be required to reinstate the property.
Rent
Whilst the question of rent should be simple, there are a number of issues which may have to be considered; will VAT be added to the rent; is there to be a rent-free period granted to the tenants; is there to be a rent review? All of these issues require careful consideration.
Rent payment dates
Generally, landlords expect rent to be paid in advance on 28 February, 28 May, 28 August and 28 November in each year.
Use of the Property
FRI leases usually restrict how the premises can be used. This is often linked to the planning permission but sometimes the use is very specific, so as to ensure that landlords have a proper mix of businesses at the development and that there is no unreasonable competition between tenants.
Assignation and Subletting
FRI leases very often restrict the tenants’ ability (transfer) to assign or sub-let. Landlords will seek to ensure that such arrangements can only be entered into with their consent and may impose certain conditions on any prospective assignees. Careful drafting and negotiation is required to ensure that the basis on which the landlords give consent is not too restrictive.
Landlords often impose strict prohibitions on sub-letting and, once again, the conditions must be considered carefully to ensure that they are reasonable in all the circumstances.
Damage/Destruction of the Premises
The default legal position is that if the premises cannot be occupied the lease will automatically end. However, most FRI leases expressly exclude this default position and provide that the lease will continue in the event of damage or destruction.
End of Lease
Leases will not automatically end on the termination date, unless valid notice has been given. If notice is not given the lease may automatically continue for up to a year. Landlords have no right to recover possession before the actual expiry unless the tenants have defaulted or a renunciation (surrender) of the lease is agreed.
Notice
Generally speaking the period of notice required to terminate commercial leases is 40 days prior to the termination date; this may, however be increased by agreement. Different rules apply depending on the length of the lease and the extent (and type) of the premises.
Tenancy of Shops
Under the Tenancy of Shops (Scotland) Act 1949 a tenant of a shop may apply to the court for a short extension of the term of the lease where the lease has come to its natural expiry.
Environment and Climate Change
In recent years, environmental issues have begun to impact on commercial leases, with a requirement on landlords to provide energy performance certificates to tenants and with the growing popularity of “green” leases.
The above is a brief summary of the main terms of commercial leases (and FRI leases, in particular). However, all cases are different and all commercial leases will have to be considered in the light of the surrounding circumstances.