Business Leases and Commercial Tenancies

What is a Tenancy?  

A tenancy is an "estate in land", granted for a determined period of time (term of years or fixed term -  6 months,1 year, 21 years, 99 years etc) or a specific period (a periodic tenancy - yearly, monthly, weekly, even daily).

In return for the "time limited" but exclusive use and possession of the land (and any building/s on the land) the tenant pays his landlord a rent.

The landlord may be the freeholder (owner for life - life tenant) or a tenant herself. e.g.:

So long as each subsequent sublease is shorter that the previous one there is no problem.

To all intents and purposes, whilst a tenancy is in force, the tenant occupier is the owner of the land and can act as any other owner would, so long as it's within the terms of his lease agreement and current statutory requirements (Acts of Parliament) 

The Business Lease or Commercial Tenancy 

Unlike residential tenancies, the main Acts of Parliament only affect business tenancies when they come to an end. At this stage the Landlord & Tenant Act 1927 Part I and the Landlord & Tenant Act 1954 Part II may apply.

Up until this point business tenancies are governed by the general law of landlord & tenant which is common law (contractual) as enhanced by statute. 

So disputes during the term of the lease (interpretation of covenants, sub-lettings and assignments etc) will be reviewed by the courts according to precedent and any statutes affecting that particular covenant.

The business tenancy legislation is mainly used to solve problems of security of tenure and grounds for possession at the end of a tenancy.

The Landlord & Tenant Act, in effect, sets out a set of rules governing security of tenure for business tenants.  Unless a business tenant fails to pay the rent, or breaks some condition of the tenancy, the landlord can only bring the tenancy to an end under certain specified conditions, and after serving a special notice.

When a notice of termination has been received by the tenant she has the right to apply to the court for a new tenancy and the court must grant one unless the landlord can show he is entitled to possession. 

There are a limited number of grounds upon which a landlord can claim possession at the end of a business tenancy

What is a Licence? 

A tenancy gives the tenant a legal interest in the land - in effect, legal ownership for the period of the tenancy. The tenancy can even be sold (assigned) to another tenant. 

The grant of a license does not create an estate in land and the licensee does not gain an interest in the property, purely permission to occupy it. 

The security of tenured afforded to tenants on business leases does not apply where the premises can be shown to be held on a license. See Licenses.

Letting outside the Landlord & Tenant Acts 

There are several instances where the tenant may not have the security of tenure protection of the Landlord & tenant Acts.

• Agricultural tenants, service tenants (tenancies connected with employment) and where premises are used for business, even though this is prohibited by the terms of the tenancy.
• Where a tenancy is for a fixed-term up-to six months, with no right to extend or renew.
• A tenancy sanctioned by the courts beforehand granted on the specific understanding that the protection of the Act shall not apply. This in known as "contracting out of the Act"

Creating a Business Tenancy 

A tenancy can be created by the conduct of the parties and does not need to have a written agreement to be legally binding. 

Once a person is given possession (exclusively) of land or property (usually evidenced by possession of the keys) and the owner accepts rent payments, a tenancy comes into existence legally.

Creating tenancies on a casual basis such as this (even for friends, perhaps especially for friends) is not the sort of thing any sensible landlord would do! A written agreement or lease is absolutely crucial to any successful tenant - landlord relationship.

Any landlord (or tenant) without a written agreement is "in the lap of the Gods" or, more specifically, the civil court judges. 

Unlike residential tenancies, business tenancies tend to be set-up on the caveat emptor principle, let the buyer beware. Landlords generally try to get the best rent and the most favourable lease terms they can, given the prevailing property market.

It's up to the tenant to negotiate and question lease terms and rent levels and to make sure there are no excessive obligations. 

For instance, if the property has defects and the tenant takes on repairing obligations then he could be in trouble. Ideally tenants need a survey prior to signing a Full Insuring & Repairing Lease.

Tenants in any doubt should seek legal advice.

The Institutional Lease 

The bedrock of the UK commercial property market has traditionally been the 25 year Full Insuring and Repairing (FRI) lease with perhaps 5 yearly upward only rent reviews.

This type of lease has encouraged institutional investor landlords such as pension funds to invest directly in property. It gives them a guaranteed clear return on their investment, provided of course they let to substantially reliable tenants.

Despite a far less predictable business environment the modern standard business lease, even for secondary property, is regarded as an FRI lease with upward only reviews.

However, now there is a trend towards much shorter terms and the use of break clauses - the ability for the tenant (and sometimes the landlord) to break the lease at some specified time) and some are now questioning the up-ward only element in the rent reviews.

Tenancy Agreement or Lease? 

Ordinary written tenancy agreements can be bought "off the shelf" from various sources. see Tenancy Agreements

So long as these agreements have been well drafted they often suffice quite nicely for business tenancies. Experienced landlords and agents often like to include specific clauses of their own, and may have them prepared by a solicitor.

An ordinary written agreement cannot be used for a tenancy exceeding three years in length. Tenancies for longer periods need a lease by deed. 

Anyone can draw up a tenancy agreement, but a lease by deed requires a solicitor or licensed conveyancer.

Grounds for Possession 

A landlord can only oppose a tenant's application for a new business tenancy on a limited number of grounds, where:

• The tenant has not sufficiently complied with the lease terms or otherwise failed to behave properly as a tenant.
• The landlord can provide suitable alternative accommodation for the tenant.
• The landlord may suffer financially when a sub-tenant occupying only part of the premises gets a new tenancy.
• The landlord requires possession to demolish the property.
• The landlord intends to use the premises himself for a business or a residence.

These grounds are by no means automatic and will often require interpretation by the courts in specific cases. See the Landlord & Tenant Act 1954 Part II for more detail.

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