Commercial Property: FAQs

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I am a tenant in a commercial unit, what happens when my lease ends?

Unless your lease is ‘Contracted Out’ (contracted outside the security of tenure provisions of the Landlord & Tenant Act 1954), the lease of your unit will not come to an end at the expiry of a fixed term and instead will continue unless it is terminated in a manner specified by that Act.  This is known as security of tenure. 

If you have security of tenure, the landlord will have to serve you with a specific notice (Section 25 Notice) and this will either state that the landlord opposes the grant of a new lease or it will say that the landlord has no objections to the grant of a new lease and will set out the terms for that new lease.  You also have an opportunity to request a new lease (Section 26) if the landlord does not serve you with a Section 25 notice.  If you are content to stay put, you can do nothing which means that after the contractual term ends you will be ‘holding over’.  In these circumstances the terms of the old lease continue after the end of the contractual term until such time as the procedure under the Act is triggered either by a Section 25 notice or a Section 26 request.

If your lease is ’Contracted Out’ then upon reaching the end of the contractual term of the lease, you will have no right to remain in the unit and the landlord is under no obligation to grant a new lease to you.

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What is a rent review?

Whilst annual rent will be agreed prior to entering into a lease, it is essential to consider provisions for varying the annual rent during the term of the lease to reflect current market conditions. 

As such, a lease will often specify that rent reviews will take place on every third or fifth anniversary of the commencement of the lease. 

In addition, a landlord will often seek to set a rent review for the penultimate day of the lease term (especially if the lease is one that will give a tenant security of tenure). 

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What do the terms FRI and IRI mean in relation to leases?

An FRI lease is a Full Repairing and Insuring lease which obliges the tenant to meet the costs of all repairs and insurance, both internal and external.  In practice, the landlord will usually obtain the insurance and the tenant will be invoiced to meet this cost.  Where the tenancy is in a multi let building, the landlord will usually carry out repairs to the common areas and again will seek repayment of a proportion of the cost through a service charge.

An IRI lease is an Internal Repairing and Insuring lease whereby the landlord is responsible for the costs of external and structural repairs.  The tenant is only responsible for repairs to the internal areas of the property and again the landlord is likely to seek repayment of a proportion of costs for repairs to common areas through a service charge.

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What is a break clause?

A break clause is a clause that is included in a lease to allow the tenant or the landlord (or both) to end the lease before the contractual termination date specified in the lease.  Such a clause can be drafted to be exercisable on a rolling basis, at any point throughout the term or, if preferred, on one or more specific dates.  A break clause can be drafted to only take effect if specified conditions have been met such as all rents being paid up to date.

A landlord can only exercise a right to break if the lease is one that is ‘Contracted Out’. Only a tenant can exercise a right to break a lease where the tenant has security of tenure.

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I am taking a lease and am required to pay a rent deposit, what is this?

A Rent Deposit is a specified sum of money, usually calculated on the basis of a particular number of months’ rent, and is payable by the tenant.  The landlord will hold this as security for the payment of rent and the tenant’s performance of the tenant’s covenants in the lease. 

A Rent Deposit Deed should be entered by the landlord and tenant alongside the lease and this will specify the circumstances in which the landlord can access this fund, such as where the tenant has not paid rent on time.

A rent deposit may be required where the tenant is a new company with no filed accounts or where no references are available prior to entering the lease.

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Besides anything outlined in the lease, what other restrictions may there be to my proposed use of the property?

When considering taking a lease, it is always advisable to carry out due diligence on the property in the same manner as if purchasing a freehold property.  

By instructing searches, obtaining Land Registry title documents, inspecting the property on the ground and making thorough enquiries of the landlord, you will be best placed to fully appreciate any additional restrictions that may exist.  

For example, a local authority search result will reveal if the property is a listed building or situated in a conservation area; the title documents may prohibit the use of the property for certain purposes; or an inspection of the property may reveal a physical obstruction to the planned use of the property. 

All of these examples could potentially make the property unsuitable or certainly less desirable for the intended use and so it is essential to look not just at the terms of the lease but the property as a whole.

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What is an Option Agreement?

An Option Agreement is an agreement entered into by the owner of property and a potential purchaser.  On entering the agreement, it is usual for a non-refundable sum to be paid to the owner in return for a legally binding option to purchase the property either within an agreed period of time or after a specified event. 

For example, a developer may be interested in purchasing a plot of land to develop but does not want to commit to the purchase until planning permission is granted as the land will have little value without such consent. 

This benefits the developer as he has peace of mind that the land will not be sold to someone else until the option expires.  Equally, he can walk away from the purchase if he does not obtain the required planning permission.  From the owner’s perspective, even if the developer does not go ahead with the purchase, he will usually be entitled to keep the option fee already paid.

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What is an assignment of a lease?

A tenant may, for commercial reasons, wish to leave commercial premises prior to the end date of a lease.  One way of achieving this is to assign the benefit of the lease to a new tenant.  Most commercial leases will contain a clause restricting the tenant’s ability to assign the lease.  Frequently, assignments of part only of the premises will be prohibited but the lease will often allow the tenant to assign the whole of the lease subject to first obtaining the landlord’s consent which may not be unreasonably withheld.

The lease will often require the landlord to provide consent by way of a Licence to Assign for which the landlord will require payment of his legal fees. In addition, the landlord will often require the outgoing tenant to enter into what is known as an ‘AGA’. Under the AGA the outgoing tenant will have to guarantee the obligations of the tenant to whom the lease is being assigned.

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What is an Overage Agreement?

An Overage Agreement is where land is sold on the basis that if conditions specified within the agreement occur, the seller is entitled to an additional sum of money or an ‘overage payment’. 

For example, a developer has purchased plot of land ‘A’ for which planning consent for development has already been granted.  The developer now wishes to purchase a neighbouring plot of land ‘B’ for which planning permission is yet to be obtained.

However, the developer requires plot B, whether or not planning is granted, as in the absence of planning it will still be of use as access to Plot A.  The developer will however be unwilling to purchase plot B for the same value if planning permission has not been granted as he would if planning had already been obtained. The owner will also be unwilling to sell plot B for the value of the land without planning, knowing of the possibility that planning permission will be granted in the near future, later increasing the value of the land.

One way to satisfy both parties is to enter an overage agreement whereby plot B is sold at the current value in the absence of planning permission with the condition that on the grant of planning permission, the developer must pay an agreed additional sum to reflect the increase in value of the land.

For further advice on any of the FAQs above, contact our Commercial Property team.

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