The most important lease clauses for commercial tenants to understand
By Stephen Gold
There is no doubt, all negotiations for rent reviews and lease negotiations are reliant on comparing with other similar property within the same area. The only way for a tenant or his surveyor/agent to get these comparisons is for them to discuss with other friendly tenants or their surveyor/agent and only then, if the tenants understand the legal complexities of the Landlord & Tenant Act 1954. In many respects, all tenants are in the same boat with their need for this information and therefore it would be most useful for tenants or their advisors to be able to refer to a catalogue or list of comparable evidence which could be put together either by themselves or with the assistance of other tenants and/or their advisors.
Over my many decades, on numerous occasions I have come across a number of tenants who try to save money on fees and attempt to carry out their own negotiations or I’ve found many shop owners new to their business, think the rent required by their landlord is a fait accompli and they think they have no rights to negotiate or more often than not don’t know how to as they are completely unaware of the minefield of pitfalls in commercial leases. I therefore set out just a handful of lease clauses tenants must watch out for whether they have a rent review or lease renewal coming up.
Important lease clauses for commercial tenants to understand
Use: It is important to have as wide a use as possible. If a restricted use, depending on how restricted, the tenant can expect a rent discount because the bigger the restriction, the harder it becomes to sublet or assign the lease should they require in the future. e.g I was acting for a Housing Association in Beckenham, Kent in negotiating the rent review of their offices. The lease stipulated the use was for Housing Association only. Almost impossible to let or assign. I demanded and achieved a heavy discount on the agreed market rent.
Floor Areas: Tenants should be aware that different types of buildings, for comparison purposes (comparing like with like) the rents are usually calculated as follows:
- Industrial/warehousing and retail shed type units based on total gross internal areas.
- Offices rent is based on net internal areas having taken out WC’s, lifts, common parts, corridors (not within the demised) and staircases and stair ways
- Retail shops with shop fronts are calculated on what’s known as Zoning method. Depending on size of the shop, it is considered the first 20 feet from the front is known as Zone A as it is considered the most valuable, the 2nd 20 ft known as Zone B is considered as ½ the value of A, the next 20 ft is Zone C with a value of ¼ the value of A, the next 20 ft is valued at 1/8th of A. the last section is known as the Remainder. If 1st floor or maybe basement is used as sales area or other upper floors are sales areas then the comparison should taken from similar shops. Often 1st floor retail value is about 1/6th of zone A. This can all vary, especially if there is a step or 2 steps or more which could make that Zone less value. A wall built into a zone, could also make the following Zones worth less. In large units, the comparison can be based on 30 ft Zones. Even larger units, the comparison is based on overall £ per sq ft. For much larger shops and department store type premises, it’s based on whatever method used in the comparison.
- Restaurant use is usually valued on an overall basis with eating areas on lower and/or upper floors increasing the value. Again, depends on the comparisons used.
Note 1: As an example, a friend of mine had a small lock-up shop in South Molton Street, Mayfair a few doors from my office and he asked me if I thought the rent he was about to agree was fair. The landlord had one of the world’s largest firms of surveyors acting for them and after many months of negotiation, the tenant was prepared to agree a rent based on £100 per sq ft for Zone A which totalled £47,000 per annum. I said £100 per sq ft sounds spot on to me (a lot more these days) but something didn’t sound right for such a small shop so I spent a few minutes re-measuring it. I then told the tenant based on my calculations, £100 per sq ft worked out at £37,500 per annum. It appeared the massive, world famous landlord’s surveyor had included the side entrance leading to the upper floors making the area far bigger. By accident? Intentional?
Note 2: Beware of comparing premises which are very different in sizes. The larger the premises, the more chance the tenant has in negotiating a discount for quantum when comparing with smaller or more standard premises.
Disputes: When agreeing a new lease, there would be a clause which states in the event of the rent review not being agreed, the matter should be taken to the RICS (Royal Institution of Chartered Surveyors) who will in turn appoint an impartial surveyor. He will listen to both party’s argument and counter argument and then he will decide on what the rent is to be. The Landlord and the tenant will have to pay the impartial surveyor’s fees as well as any surveyor acting for them. However, take notice, the lease will state the impartial surveyor must act either as an Expert or as an Arbitrator. My advice is not to agree if the new lease says Arbitrator but to insist on being an expert. The reason I say this is the Expert determines the dispute using both the evidence submitted and his/her own expert knowledge also, the Expert may seek further evidence in addition to that submitted by the parties. However, the Arbitrator can only determine a dispute by only referring to the evidence submitted.
Service Charge/Maintenance: More often than not, of course depending on the terms of the lease, the tenant might be responsible for an agreed proportion or percentage of the maintenance of entire building. Depending on the terms of the lease, if you occupy the basement, you can often be expected to be responsible for the repair of the roof and likewise, if you are located on the ground floor, you may well be responsible for the service and repairs of the lift whether you use the lift or not. All quite common but depending on the wording of the lease.
Landlord’s right to refuse new lease: At the termination of a lease covered by the Landlord & Tenant Act, although the tenant might think they have the right to a new lease, they should however be aware the landlord has the right not to renew the lease on the following terms:
- The tenant has breached their repairing covenants and the property is in a state of disrepair;
- The tenant has persistently paid rent late;
- The landlord offers the tenant a lease of alternative suitable premises;
- That the tenant’s current lease is a sub-let of part only of the premises and offering a new lease of that part would not be financially viable for the landlord who requires possession of the whole of the premises in order to make a commercial rent.
- That on termination of the current lease, the landlord intends to occupy all or part of the premises.
These are all just a very few of the important pitfalls a tenant would need to watch out for.