Talking heads - standard terms in leasing a commercial property

Whatever type of commercial property you are looking to rent, be it offices, a restaurant, warehouse or retail premises, careful consideration is needed before entering into a commercial lease arrangement. All elements of a lease need to be understood and successfully negotiated to minimise misunderstandings and save time and money.

Heads of terms set out the key provisions of a commercial lease between a landlord and tenant. They are the first step and provide understanding between the parties. They require scrutiny to ensure all potential consequences have been incorporated to avoid unintended consequences and pitfalls.

Whilst terms can contain almost anything, there are standard terms that should be included in most typical lease transactions.

Standard heads of terms

Term Description
Parties Details and address of the landlord and the tenant, including company numbers if relevant.
Premises Brief description of the premises and a plan showing the area to be leased edged red. A scaled plan should also be produced if the lease is for more than seven years and one day as it is registerable at the Land Registry.
Term State length of lease with a clear term commencement and expiry date.
Annual rent

The yearly rent should state whether Value Added Tax is payable and whether it can be claimed back. Be clear whether the rent is inclusive of insurance, service charge and rates or is to be paid separately by the tenant

If rent needs to be paid monthly rather than quarterly ensure this is included.

Service charge If a service charge is payable, state whether this is a fixed, estimated or a capped amount. Also, any items excluded from the service charge should be stated.
Repair Ensure the repairing obligation on the tenant is clear. If it is to keep the premises in good and substantial repair carry out a survey and consider whether a schedule of condition is required.
Alterations Leases can sometimes exclude the tenant carrying out structural and external alterations. Ensure this is allowed with landlord consent, as well as the ability to carry out non-structural alterations. You may also wish to carry out minor works without consent such as installing demountable partitioning.
User State the user permitted and authorised for the premises, which should meet your requirements, otherwise a change of use will be required. A local search would confirm the authorised use but get confirmation at an early stage from the landlord.
Alienation

Flexibility is needed to allow you to deal with the premises by way of assignment, underletting, charging and group company sharing.

Consider what conditions are required on assignment and whether you are absolutely required to give an authorised guarantee agreement.

Specify whether underletting is required completely or in part.

Retailers - consider if you require the ability to grant concession agreements.

Break clause On a ten-year term, a five-year break is recommended. Any breaks should be unconditional.
Rent review Agree how and when rent is to be reviewed.
Excluded lease State whether the lease is to be an excluded or protected tenancy.
Warranties If a new build ensure you are given the benefit of warranties.
Legal costs It is usual for each party to bear their own legal and surveyor’s costs. Be clear on this and if either party contributes to the other’s costs.
Timescales Clearly state timescales on completion. Take into account your target date for opening or being operational from the premises.

Practical considerations

In addition to ensuring key heads of terms are included, there are additional practical considerations to a lease arrangement, which will reduce the likelihood of nasty surprises and additional costs.

Arguably, the most important is to know of any liabilities linked to the property that are payable by the tenant. These would include service charges, insurance costs, rates, and utilities. Knowing what they are and obtaining estimates will ensure you are aware of all likely outgoing costs at the outset. Additionally depending on the level of rent, stamp duty land tax may be payable on the transaction and land registry fees if the lease is registrable.

You will also needs to consider how long it will take to fit out the premises and obtain planning permission or licences, which will affect the date you can operate from. If bespoke elements are needed to successfully operate from the premises and these are not covered in the terms then you runs the risk of not being able to utilise them fully.

Comment

Heads of terms focuses the parties’ minds to the deal. It assists in understanding the parties’ intentions so that the lease documentation can be agreed in a timely fashion, ensuring you are able to start running your business within the timescales required.

Read other items in the Commercial Brief - September 2018