Business leases guide

Transcription

1 Business leases guide BUSINESS LEASES GUIDE Contents What is a business "tenancy"? Creation of a tenancy Common terms in lease Repairing liability FRI terms Landlord's covenants Insurance Tenant's continuing liability Landlord's continuing liability Indemnity Rent reviews The right to renew Forfeiture Guarantors Licence to assign What is a "business tenancy"? A tenancy exists where someone lets premises (with exclusive possession) to another for a term in return for a rent. The term of the letting is usually a number of years. It is however possible to create a weekly, quarterly or yearly tenancy, provided the term has a certain duration. The expression "business tenancy" is commonly used to refer to a tenancy of premises used for the purposes of a business. The premises may be a building, part of a building or even open land, used for example as a haulage depot. Business in this context however does not include agricultural property, where a different set of rules and customs applies. In many ways the law relating to business tenancies is the same as for any other type of tenancy. It is however convenient to consider business tenancies as a topic in their own right. One key distinction between business tenancies and other tenancies is that with a business tenancy the tenant may have the right to apply to the county court for the grant of a new lease at the end of his term. This is dealt with below under the heading The Right to Renew. Creation of a tenancy A tenancy can come into existence in one of three ways:- 1. By a formal document, called a lease. A lease is usually in the form of a deed. This is the most common normal method of creating a business tenancy. 2. Tenancies for three years or less can be created by a document which is not a deed. A document of this type is often referred to as a "tenancy agreement" rather than a "lease". 3. A tenancy can also be created by oral arrangement by the parties or even by conduct. This normally happens where the landlord simply lets the tenant take possession and, with the intention of creating a tenancy, the tenant pays and the landlord accepts rent. The landlord should generally avoid creating tenancies in this way for a number of reasons. Quite apart from the question of proving what the terms of the agreement were, the landlord will have no right to take the premises back in the event of the tenant failing to pay his rent. Additionally even under this arrangement the tenant gets the right to apply to the court to renew.

2 There is no practical difference between the meanings of "tenancy" and "lease". (To be pedantic the word "lease" really refers to the actual document by which a tenancy is created). Common terms in tenancies The relationship between landlord and tenant is likely to subsist for a number of years. It is therefore an important one. The tenant will want to know where he stands and to know that the obligations which the lease imposes on him are reasonable. The landlord's interest is to make sure that his rental income is secure and that the value of his property is preserved. He will not want to see the premises deteriorate. The tendency has been for modern leases to become longer and impose more onerous obligations on the tenant. This tendency is probably the product of the fact that the custom is for the landlord's solicitor to draft the lease and for the tenant's solicitor then to review and amend it more towards being in favour of the tenant. Another factor which militates in favour of leasehold obligations becoming more onerous is the demand of institutional investors for a lease which is structured so that the landlord can calculate with a fair degree of precision the return it will receive from its investment in the property. The landlord will be looking to see that the tenant maintains the property in a good state of repair and that the landlord simply receives rent without having to incur any further expense in relation to the property. However complex, every lease will have to deal with a number of basic points and these include:- 1. Identification of the parties, i.e. who is the landlord and who is the tenant. It may also be necessary to identify a guarantor for the tenant. 2. Stating the amount of rent 3. The lease must identify the tenant's repairing obligations. Is the tenant to repair the whole of the building or simply the interior? In buildings which are let out as parts, say floors of an office building or shops in a shopping centre, each tenant may maintain the interior of his own unit but the landlord may maintain the structure of the building but recharge the cost of so doing to the tenants through a service charge. 4. The tenant's obligations to decorate the premises will be set out. 5. Leases will normally state whether the tenant can alter the premises and if so whether the landlord's consent is needed for some or all types of alterations. 6. The lease will normally restrict the purposes for which the property can be used. 7. The lease will deal with who must insure the premises and whether, if the landlord insures, the tenant reimburses the landlord the cost. 8. Whether there will be a rent review, the periodic review of the rent during the term of the lease, usually to market value with a dispute resolution procedure. 9. The lease will contain a number of other detailed provisions under heads too numerous to set out in this note. 10. Nearly every lease will allow the landlord to "forfeit" (that is cancel) the lease if the tenant fails to pay the rent or observe its obligations under the lease. In practical terms the operation of this type of covenant is subject to restrictions imposed by law. Repairing liability Probably the most important thing to consider when taking on a lease is the extent of the tenant's repairing liability. The repairing obligation is likely to fall into one of two categories:- 1. Full repairing. The tenant is responsible for the whole of the premises including the structure of the building. 2. Interior repairing. The tenant only maintains the interior of his premises. If this is to be the case it is important to define exactly what parts of the premises the tenant must repair and ascertain who is to maintain the rest of the premises. A full repairing obligation is onerous. Tenants are often persuaded to take on a full repairing liability even when the lease term is quite short, say five years. Sometimes tenants will take on full repairing obligations in respect of an old, dilapidated building. A tenant who agrees to do this may live to regret it. An obligation to keep premises in repair during the term of the lease has been held to amount to an obligation to put them into a good state of repair even if they were in a poor state at the outset. If a tenant takes on a large

3 building on several floors intending only to use part, say the ground floor, he will still have to keep the rest of the building in a proper condition unless the lease says he need not. If the landlord alleges that the tenant has failed to comply with his repairing obligations, he may serve what is called a "schedule of dilapidations". This is simply a list of alleged breaches of the repairing covenant. A schedule of dilapidations can be served during the term of the lease or after it expires. FRI terms A phrase often used is "FRI terms". What this means is that one way or another the lease imposes on the tenant a full repairing and insuring liability. Usually the tenant's obligation will be actually to do the repairs but to reimburse the landlord with the cost of the insurance. Where the landlord carries out the repairs but charges the cost to the tenant through a service charge, the lease is still said to be on FRI terms because it is the tenant who bears the ultimate cost of both repairs and insurance. Landlord's covenants Landlords usually give relatively few covenants to the tenant. The normal ones are:- 1. A covenant for quiet enjoyment. 2. A covenant to insure the premises. Where there is to be a service charge the tenant will expect to see landlord's covenants to provide services. The tenant will want to see that the landlord is under an actual obligation to provide the services because the tenant's enjoyment of the premises may depend on services being provided properly. To take the example of a shop in a mall, the tenant will suffer if the shopping centre is allowed to deteriorate and is not kept clean, tidy and attractive. Insurance Most leases will provide that the landlord will insure the premises and charge the insurance cost to the tenant. The amount charged will often include not only the insurance premiums which the landlord pays but also the cost of periodic valuations of the premises in order to ascertain the amount for which the property should be insured. The landlord should normally insure the premises for what it would cost to rebuild if they were destroyed. The landlord will often try to provide that his obligation to insure is limited to insuring in whatever sum he thinks is appropriate. The tenant will want to make sure that the building is insured for an adequate amount. He will also hope to see a provision that any shortfall in the insurance monies should be paid by the landlord. Otherwise the tenant might find himself in a position where it is the tenant who effectively has to make up the shortfall. This is a difficult area and requires detailed consideration in every case. Where a number of tenants occupy a building insured under one policy the lease will provide for the apportionment of the insurance costs among the tenants. Sometimes a lease will provide for the tenant to insure. This is less beneficial to the landlord. If the tenant fails to insure, while the landlord may have a claim against the tenant, this claim may be worthless. Since the landlord's interest in the premises is usually greater than that of the tenant, it is normally preferable for the landlord to effect the insurance. One problem which commonly arises over insurance is where the tenant thinks that the landlord could insure the premises at lower cost than is the case. It is established in case law that unless the lease so provides, the landlord does not have to be reasonable in choosing with whom he will insure the building. Sometimes a landlord will change his insurer if the tenant obtains a cheaper insurance quotation. If he refuses, the tenant will often have no recourse. Tenant's continuing liability

4 Normally a tenant will remain liable on the covenants in the lease for some time after he has parted with the lease, e.g. by selling it to someone else. The rules are complicated but fall under two categories:- 1. Leases created before 1st January The tenant is liable for as long as the lease continues and indeed that liability can extend beyond the contractual term of the lease. 2. Leases created on or after 1st January In practice, the tenant will be liable while he holds the lease and after he transfers it to another person, for as long as that person holds it. This subject is one in its own right and it dealt with in our publication "The Continuing Liability of Tenants of Leasehold Property". Landlord's continuing liability It should be noted that a landlord also remains liable also for the covenants which he gives in the lease even if he sells his own interest in the premises. Subject to a provision (applicable only to recent leases) entitling the landlord to ask the court to release him, the landlord's liability subsists during the whole of the remaining term of the lease (and that liability can also extend beyond the contractual term of the lease). Indemnity Where a party remains liable on the covenants in a lease after he transfers his interest in the property to someone else, it is common for him to take an indemnity from the purchaser to protect him against the consequences of later breaches of the terms of the lease. Rent reviews A landlord is granting a lease for say fifteen years will expect the rent to be increased every so often. Most tenants will accept this. Therefore most leases for other than short terms will contain a rent review clause. The key features of a normal form of rent review clause are: 1. The clause will state how often the rent will be reviewed, usually every three years or every five years. 2. It will lay down the criteria for review which is normally a form of words by which the rent is reviewed to then current market value. 3. Usually the clause will provide that the rent cannot go down on review; that it can either stay the same or go up. If the market rent has fallen, this will mean that the tenant will be paying more than market value. Whether a tenant should agree this type of clause, or insist on a rise and fall rent review clause, is a matter for negotiation before the lease is granted. 4. It is common to provide that certain matters shall be disregarded such as improvements to the premises carried out by the tenant with the landlord's consent and goodwill attaching to the premises by reason of the tenant's occupation. 5. The rent review clause must lay down the mechanism for review. This can be important. There are certain mechanisms, seen less often now but not uncommon in older leases, which are unfavourable to the tenant. These must be considered carefully and expert advice taken. 6. There will be a mechanism for resolving a dispute as to what the rent should be. Most leases provide that the dispute be referred to an independent surveyor. The lease will lay down how a surveyor is appointed if the parties themselves cannot agree who should act as the independent surveyor. 7. The surveyor may be directed to act either as an arbitrator or as an expert. There is a distinction between the surveyor acting as an expert and as an arbitrator. The major practical difference is that an arbitrator can only take into account evidence put before him by the parties in their submissions. He cannot take his own knowledge into account. An expert is not fettered in that way and can use his own knowledge as well as information put before him by the parties. 8. Finally the lease will deal with who should pay the costs of the independent surveyor. In a disputed rent review it is common for the parties to put forward written submissions to the expert or arbitrator including "comparables" - details of similar properties and the rents at which they have been let. In a disputed rent review the premises will have to be measured and a common benchmark is how much

5 rent per foot it is thought the premises would achieve if let in the open market. The right to renew The right to renew is one area where business tenancies have a special statutory framework all of their own. The rules are set out in Part II of the Landlord & Tenant Act The basic mechanism is as follows:- 1. Provided that the business use continues, a business tenancy which is at least 6 months in length continues after the end of the contractual term until one party terminates it in one of the ways recognised by the legislation. 2. The landlord can serve notice ending the tenancy on a date specified in the notice. That date must be a date which is the end of the contractual term or a later date. In his notice the landlord must say whether or not he is prepared to grant a new tenancy and if he is willing to renew he must set out his proposed terms. 3. The tenant can serve notice asking for a new tenancy to commence on the date specified in the notice. That date must be a date which is the end of the contractual term or a later date. As with a landlord's notice, the tenant must set out his proposed terms. 4. The above two notices may be served not less than 6 months (but not more than a year) before the date specified in the notice. 5. If the landlord serves notice ending the tenancy, the tenant must make an application to the court for a new tenancy before the date on which the landlord's notice expires. If he does not do this he will lose his right to renew. 6. If a the tenant serves a request for a new tenancy and the landlord does not want to renew the lease, the landlord must within two months of the date of the tenant's notice give the tenant written notice of the grounds of opposition. If the landlord does not do this, he will lose his right to oppose renewal. The tenant must then apply to the court for a new tenancy before his notice expires or he too will lose the right to renew. A tenant receiving a landlord's notice ending the tenancy must take advice urgently or risk losing his right to renew. If he loses his right to renew he can be at a significant disadvantage in the negotiations and may well find that the landlord refuses to renew at all. There are only certain statutory grounds on which the landlord can refuse the right of renewal. If none of these grounds exist the tenant has the right to a new tenancy (unless he loses it by failing to comply with the timetable). The grounds of refusal (in basic outline) are:- 1. Failure to comply with the tenant's obligations to repair. 2. Persistent delay in paying rent 3. Other substantial breaches of the tenancy 4. Landlord's willingness to provide alternative accommodation 5. Tenancy was created as an underlease of part of the property comprised in a lease, landlord owns an interest superior to the superior lease and landlord could achieve a better aggregate rental by letting the property as a whole rather than in parts (and intends to do so). 6. Landlord intends to demolish or reconstruct 7. Landlord intends to trade from the premises himself We must stress that the above is an oversimplified and incomplete summary of the rules. With certain of the grounds there is an additional requirement that in consequence of the relevant facts the tenant "ought not to be granted a new tenancy". To an extent this gives the court a limited discretion as to whether to order the grant of a new tenancy. If the landlord claims there is no right to renew but the tenant disputes the claim, the matter can be decided by the court. The court will decide any dispute as to what should be the rent and terms of the new lease. In practical terms most claims for a new lease are settled by negotiation and relatively few are pushed to trial in the county court.

6 Forfeiture If the tenant does not pay his rent or comply with the terms of his lease, the landlord will normally have what is called the right of "forfeiture", that is the right to cancel the tenancy. Subject to some statutory exceptions the landlord can forfeit the lease in one of two ways:- 1. He can peacefully re-enter the premises. 2. He can issue proceedings for possession. Either method brings about the end of the tenancy. However, if the landlord fails to prove that the tenant was in breach, the tenancy will not come to an end. The court also has power to grant the tenant "relief" against forfeiture if the tenant remedies his breach. However it is illegal for the landlord to exercise the right of peaceful re-entry if there is someone on the premises resisting the landlord's attempts to enter. For this reason it is not all that uncommon for a landlord to seek to achieve peaceful re-entry at night or over a weekend, when the premises are likely to be empty. There are some statutory restrictions one the right of forfeiture and these are:- 1. The landlord cannot proceed to forfeit a lease (other than for breach of the covenant to pay the rent) without giving a particular form of statutory notice to the tenant and waiting a reasonable time to allow the tenant to remedy the breach; 2. Under the Leasehold Property (Repairs) Act 1938, where the original term of the lease was 7 years or more, and 3 or more years remain unexpired and the landlord is seeking to forfeit for breach of the repairing obligation, the tenant has the right to give notice to the landlord that he claims the benefit of the Act. If he does this, the landlord can only forfeit if he first obtains the court's permission. Where the tenant invokes the mechanism of the Leasehold Property (Repairs) Act 1938 the landlord can only proceed to forfeit the lease if the court gives permission. Guarantors Often a landlord will ask for a third-party guarantee of the tenant's obligations under the lease. This is likely where the tenant is not strong financially. A person asked to guarantee a tenant's obligations should be very wary. Basically if the tenant defaults the guarantor will have to compensate the landlord for any loss sustained if the tenant breaches the terms of the tenancy. He may also have to take a lease of the premises if the lease is forfeited for tenant's breach. Licence to assign Most leases contain provision that the tenant cannot "assign" (which means "transfer") the lease to someone else without the landlord's consent (called a "licence"). It is nearly always the position that the landlord must not unreasonably withhold licence to assign. Consent is normally given in a deed called a "licence to assign". The landlord will expect his legal costs of preparing the document to be paid by the tenant. It is not uncommon for a dispute to arise between landlord and tenant as to whether the landlord is or is not unreasonably withholding consent to a particular proposed assignment. If there is such a dispute the tenant has two remedies: 1. He can apply to the court for a declaration that the landlord is unreasonably withholding consent; or 2. He can simply persuade the proposed assignee to take on the lease anyway. Provided that the landlord has been asked for consent, if the court later finds that the landlord was acting unreasonably, the assignment is valid. Legal Sharp Young & Pearce LLP, a Limited Liability Partnership registered in England & Wales, partnership number OC References to partners are references to members of Sharp Young & Pearce LLP. A list of members is available at our registered office - 6 Weekday Cross, Nottingham, NG1 2GF Site map / Search

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