Austin Lafferty’s Guide to Commercial Lease
Some commercial clients of ours who intend to take on a commercial premises lease are very experienced in leasing property, but some are not. Thus we provide all clients with an explanatory note at the outset of a transaction.
Equally, where clients are leasing out premises, the points noted apply to them, either directly or allow them to watch out for issues which will arise when they acquire a commercial tenant. We have numerous styles of documents for leasing – missives, leases, rent deposit agreements, licence agreements, licences for works, and guarantees. We also have access to and use the Property Standardisations Group’s versions of all documents where appropriate. Furthermore, whether acting for tenants or landlords, our IT and case management systems allow us to work quickly and accurately as is essential in commercial property work of all sorts.
Common Issues for Commercial Landlords and Tenants
It is important that we draw your attention to various matters that arise out of you becoming a tenant of commercial premises. Each lease is different, but there are common issues arising out of agreements between commercial landlords and tenants.
What is a Full Insuring and Repairing Lease?
The lease is the fundamental document that regulates the agreement to let the premises, and is what is called a full insuring and repairing lease. This in effect, means that once you are in as the tenant, you are obliged to keep the premises in good physical condition and trade legally and constantly during the course of the lease. Any repairs required to be done are your responsibility and whilst the landlords effect insurance of the premises, you pay the premiums for that insurance. You may obtain directly, or instruct us to obtain a copy of the insurance policy unless you have already seen it and provide a copy to you. It is then your responsibility to check it over and make sure it either covers everything you would wish, or that you take out additional insurance to cover items not included. The cover will generally insure the building, but not the contents, and not plate glass, so you should consult your own broker about what personal cover to effect.
As the tenant, you are also responsible for the commercial rates payable, and payment of costs of any local authority repair notices served during the period of the lease, as well as most costs of the upkeep of the building and the running of the business.
Survey of the Property
It is certainly worthwhile getting a survey of the premises done. This has two effects. The first is that it confirms to you that the rental and other financial considerations being asked or demanded by the landlord are either fair or not, and also it highlights any suspected or actual defects or areas of disrepair in the property. This is very important as when the lease comes to an end it will be your responsibility to remedy any defects and leave the premises in good tenantable order. You are assumed to take the premises over in that condition unless the landlord agrees to any repairs or acknowledges any disrepair. The fact that it was in poor condition when you took it over will not help you at the end of the lease unless the landlord agrees to waive certain defects from the dilapidations schedule. The survey is your best assistance in seeking to negotiate a limitation on the dilapidations.
Schedule of Dilapidations (Repairs)
In fact, at the end of any lease, a landlord issues a schedule of dilapidations which is a list of repairs needing to be done. These are the tenant’s responsibility and more or less always the list initially issued by or on behalf of the landlord is severe and inflated. Your solicitor can attempt in advance to limit the works to be done in the future, but only if they have a full report from a surveyor so that they can identify these. If you choose not to get a survey, then you take the risk that the landlord at the end of the lease denies that there were any defects or disrepair when you took over, and you will be stuck with paying for the work to bring the premises back to a state of good tenantable order.
Concluding Missives for the Lease
Prior to completion and execution (signing) of the printed lease, your solicitor is required to have concluded missives for the lease, constituted by a legal offer, acceptance and any further letters to agree to all clauses. Entry to the premises cannot be concluded without signed missives. The missives are constituted by a written and signed offer by your solicitors, an acceptance ( in writing) of that offer, and any further missives designed to iron out disputed legal clauses.
In leasing transactions though, sometimes the landlord will issue the offer, and it is then for the tenant to instruct a (qualified) acceptance. The offer and acceptance (known as a qualified acceptance as it contains qualifications or amendments to the terms of our offer) contain numerous legal clauses and conditions. These are designed to protect the respective interests of the landlord and tenant. They can vary from transaction to transaction depending on the property and the wishes of both clients. It is crucial that you realise that once a written offer goes in (or is received), you have not yet formed a binding contract to lease the property. You are neither bound to lease it at that point, nor can you insist on leasing it. The landlord requires, through his/her solicitor, to issue the qualified acceptance. You then as prospective tenants have an opportunity to instruct your solicitor to respond to any conditions in the qualified acceptance with which you don’t agree and they will do so in writing with a further missive. In order to complete the contract, the landlord’s solicitor needs to write back to your solicitor confirming that the additional clauses or changes are agreed upon. Once all clauses are agreed then a binding contract exists and neither party can back out without the other’s agreement.
Ongoing Responsibilities for the Tenant as Occupier of the Premises
There are numerous ongoing responsibilities that fall on the tenant as occupier of the premises. These include various health and safety matters, responsibility as an employer if you are taking over staff, asbestos control, fire safety, public liability insurance, which are all ongoing matters and which you as the tenant in effect take over. We can attempt to have the landlord prove to us that there are no breaches of legal responsibility , prosecutions or formal notices affecting the premises (and therefore you after the date of entry) prior to you taking over, but after that, you are liable to ensure that the business and premises are run lawfully. Please read over the offer and missives following it to see how these matters are referred to. Please ask any questions you may have on these aspects. However, we are not health and safety experts nor employment lawyers, so you may need to take advice from other professionals to keep you right.
Whose Name is the Lease to be in?
Whilst you as a client may assume that you personally should be the tenant, you may prefer to consider the possibility of floating a new limited company (or using one you already have) as the actual tenant. As well as possible tax advantages to this, if the tenant is a limited company of which you are merely a shareholder and/or director, then all legal liabilities will fall on the company and not on you (as long as you are not running the company improperly or in an insolvent state). This places the risk on the company so that if the business fails or you cannot, for one reason or another, continue the lease, then the landlord can only take enforcement action against the company and not against you personally. There are numerous factors to consider when deciding how to constitute or structure a business, but the purpose of this note is to get you thinking about the matter. We are happy to discuss things further with you, and if appropriate to assist you in starting up a company. Note however that most landlords will ask for a personal guarantee for rent , and/or seek a rent deposit where a new or new-ish limited company is being used as the vehicle for tenancy. The less a track record of trading a company has, the more security a landlord may seek.
This is important for the end of the lease period, or coming up to it. The principle of tacit relocation will apply where a landlord or tenant has failed to give the appropriate notice to terminate the lease. If no termination notice is served, the lease will continue under tacit relocation on the same terms including the rent then payable, for a period of one year if the original lease was for a term of one year or more. If the term was for less than one year, it will continue for an equivalent period. Tacit relocation will operate from year to year until the appropriate notice to terminate is served by either party.
Early Termination/Break Option
If the tenant has the right to end the lease early, there will be conditions attached to this. One thing that catches tenants is the state of the lease when the notice is given. Check the wording of any early termination clause very carefully, as depending on how the wording is done, if the tenant is in breach of the lease in any way either at the date of early termination or at the date of the notice, then the notice is invalid and the lease must continue to the end. So you could be a few days late with the rent or not have carried out some repair and be stuck with however many more years there are on the lease.
There are many more conditions and rules to be aware of. Your lease is likely to be at least 30 pages long, maybe much more, and while we do take you through the clauses to explain them, it is worth you sitting down with no distractions and reading through the lease and other documents issues to ensure you give yourself the chance to ask all questions you need to before you are bound into an onerous agreement. And don’t be afraid to ask those questions. No question will be regarded as stupid or a waste of time – becoming a commercial tenant is a very big step.
Contact our Commercial Leasing Lawyers in Scotland
Based in Glasgow, East Kilbride and Hamilton in Scotland, our commercial lease lawyers can help you. Please complete our online enquiry form here, email us firstname.lastname@example.org or telephone your nearest office to get an immediate response and advice.