Finding a commercial property

When you find a commercial premises that is right for you, what are the key legal issues to be aware of.

Heads of Term

This is a formal document particularising the terms that are agreed between the parties and include the following:

• Details of the parties
• Annual rent
• Term of the lease
• Security of tenure
• Rent review
• Rent-free period
• Rent deposit
• Service charge
• Use of the property
• Alienation – whether the lease can be assigned or sub-let to a third party
• Fit-out works
• What alterations are permitted
• Standard of repair
• Who is to insure the property

Whilst the heads of terms are not usually intended to be legally binding, they demonstrate a level of seriousness and commitment by both parties. Sometimes the heads of terms may change at the beginning of the transaction where the parties agree to a change, so it is important to make sure that you check the terms of the lease in accordance with the heads of terms before signing the lease.

Incentives for tenants

As part of the negotiation process, tenants may wish to carry out substantial fit-out works to the premises. Often a rent-free period is used as an incentive for tenants so they can fund the works.

Break clauses

A break clause can be exercised by either a landlord or tenant depending on what is agreed by the parties.

Break clauses are useful for tenants who are taking leases with a longer term i.e. 10 or 15 years and need certainty that they are not tied in financially to a lease for years without having an option to vacate the premises.

The break right usually has to be exercised on a certain date, otherwise the tenant will lose the right. It’s possible to have a rolling break right in a lease that can be exercised at any point by giving a certain amount of notice.

Tenant break rights will usually be conditional on the following:

• All rent reserved under the lease being paid up-to-date.
• The tenant complying with all tenant covenants in the lease.
• The tenant vacating the premises and returning it to the landlord free from any occupier or third party right to occupation or possession.

Stamp Duty Land Tax

Taking a new lease may attract stamp duty liability. It’s important that before you complete the lease, you check if any stamp duty is due. You can ask your solicitor to check whether there is any liability.

If the lease is registrable at the Land Registry, your solicitor will need to submit a SDLT return to HMRC, even if no stamp duty is due. Any stamp duty due needs to be paid within 14 days of completion of the lease.

Security of Tenure

A very important consideration for tenants is whether they will have security of tenure under the lease.

All commercial leases have security of tenure if the lease hasn’t been contracted out from the relevant parts of the Landlord and Tenant Act 1954 (‘the 1954 Act’). This means that when the contractual term expires in the lease, the tenant will have an automatic right to a new lease and can, therefore, stay in the premises past the contractual expiry date.

If, however, it is agreed between the landlord and the tenant that the lease will not have security of tenure, there is a specific contracting out process that the tenant must follow. If the lease does not have security of tenure, the tenant will be required to vacate the premises by the contractual expiry date.

It’s a benefit for a tenant to have security of tenure because it offers them peace of mind that they can continue their business at the premises indefinitely without having to leave the premises by the contractual expiry date.

Terminating the lease

A lease can be brought to an end in a number of ways, which may include but are not limited to:

• Exercising a break clause in accordance with the lease (if there is one).
• Negotiating a voluntary surrender with the landlord, which would require the parties to enter into a Deed of Surrender.

Where the lease has security of tenure, the lease can only be brought to an end in one of the ways specified by the 1954 Act.

1. The tenant serving a Section 27 Notice and leaving the Property;
2. The landlord serving a hostile Section 25 Notice opposing a new lease on one of the statutory grounds;
3. The landlord serving a non-hostile Section 25 Notice, therefore leading to a new lease being agreed; or
4. The tenant serving a Section 26 notice, therefore leading to a new lease being agreed.

Note that if the lease has security of tenure and a landlord wishes to exercise a break right (if there is one), a hostile section 25 notice would also need to be served in conjunction with the break notice, relying on one of the statutory grounds of opposition. Exercising the contractual right to terminate the lease under a break option alone is not sufficient to effectively bring a protected lease to an end. This limits the landlord’s flexibility to end the lease where it agrees that the lease will have security of tenure. Without security of tenure, the landlord need only serve the break notice.

Always take professional advice before signing a lease so you fully understand the terms and if it is right for your business plans.

Isabella Mason is a Solicitor at Taylor Walton Solicitors www.taylorwalton.co.uk