Commercial Tenancies:

The idea of the full repairing (including decorating) lease is that when the tenant yields up the premises on expiry of the contractual term, or sooner termination, the state of repair and condition that the premises are left in would be as envisaged in the lease.  If not, because the tenant had not complied with his lease terms, the landlord could either carry out the work and recover the actual cost from the tenant, or claim damages for breach of covenant. In any event, there is a procedure to be followed, nowadays including a protocol.

Doing the work and then recovering the cost avoids LTA27 requirements, but whether this is the better way depends on if the landlord could afford to lay out the money and/or the financial standing (including whereabouts) of the outgoing tenant.

Despite more complicated and less certain for the landlord, the LTA27 procedure is more commonly-used because old habits die hard.  The amount of damages (cash sum) is intended to cover the landlord for the cost of putting the premises into the state of repair and decoration envisaged by the expired lease, in readiness for reletting.

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Reletting

Reletting on the same repairing covenants as before might be pushing it. Tenants normally expect/want premises to be ready for immediate occupation and use. (Immediate occupation isn’t the same as beneficial occupation.) In practice, what would normally happen is that the landlord keeps the cash and on reletting grants the new tenant a rent-free period.

Depending upon how much work needs doing, the duration of the rent-free period will vary: for straightforward matters, including contribution towards the cost of the tenant’s fit-out, anything between a week and three, possibly to six months. Depending upon the duration of the free period, the profit advantage for the landlord is that the rent-free period might be less than the amount of damages.  There might also be VAT advantage. Depending on the duration, the profit advantage to the tenant is beneficial occupation before any rent would be payable,

On a new letting, landlord grant to the tenant of a rent-free period at the start of a new lease is a commercial property ‘social norm’. Whether a landlord could avoid giving any rent-free period would depend on the condition of the property at the onset and upon the bargaining strength of the parties.  Nowadays, well-advised tenants will insist upon a rent-free period.

Also for the duration to be realistic as regards any works to be done to put the property into a state commensurate with the full repairing lease. Where the state of repair, etc is such that the tenant will not accept full responsibility, the usual solution is either to have a schedule of condition, or for the tenant’s repairing covenant to be limited to no better state or repair than at grant of the lease. Without a schedule of condition (a list of defects, preferably with accompanying photographic evidence), who is to know precisely what the premises were like on grant? This is why more canny tenants aim for the ‘no better state’ provision?

Vacant Possession?

On a new letting, rent-free period, fair enough. On renewal, per LTA54, the social norm never used to include a rent-free period. After all, the tenancy is being renewed to someone already in occupation. However, partly pressure from well-advised tenants requiring by negotiation a rent-free period on renewal, recent case law is supporting the contention that although LTA54 s34/s35 does not specifically mention ‘vacant possession’ that assumption is implied. Since vacant possession means the tenant has never occupied the premises, reasoning is that where the evidence includes rent-free periods some adjustment to the renewal rent should be made, either a lower rent or a rent-free period on grant.

The court is authorised to order differential rents for the interim rent period, to reflect repairing works, also per LTA54 s24 for any substantial difference in rent between the interim rent valuation date and the market rent substantive hearing/renewal term commencement date, but I am not aware of  any case law supporting differential rents for the market rent itself. In any event, whether any period of the renewal market rent should actually be free is doubtful. More likely, as the court has emphasised on numerous occasions, it’s a question of correctly devaluing the evidence.

A rent-free period does not have to be literal, as in nil rent payable. The snag with nil rent payable on grant of a lease is that on completion the landlord will not receive any money that could pay for or go towards the cost of the transaction. Also, the tenant might have underestimated how much it cost to fit-out so that by the time the first rent payment is due the tenant does not have the money. Some alternatives to a free-period on grant are nil rent payable deferred to the end of the first year, or a lower rent during the first year of the lease. How long any concession lasts depends upon the sums involved.

Valuation

When devaluing, the existence of a rent-free period can lead to double-counting so, since occupiers are intent upon reducing property costs, the analysis or devaluation for use as evidence is important. Rent is the product of the lease, not vice versa. Although the lease would normally be completed after the rent is agreed in principle, the rent is a reflection. For example, shop premises (ITZA 300 sqft and lease 5 years) at £40,000 a year with 6 months rent-free.

The starting £40,000 pa is not the figure from which the 6 months rent-free should be deducted, but the end figure after deducting the rent-free period.  It suits tenants to reason otherwise. By treating £40,000 as the starting figure, the average rent for the 5 years would be £36,000 per annum (40,000 * 5 = 200,000 – 20,000 = 180,000/5). By adjusting the starting figure so that the £40,000 becomes the average rent pa over 5 years the subsequent devaluation on the floor areas is more favourable to the landlord/less favourable to the tenant.

ITZA 300 on £36,000 pa equates to Zone A £120, but on £40,000 pa average to Zone A £133.33. To put it another way, Zone A £133.33 is inclusive of 6 months rent-free period. Applying that evidence to a rent review in another lease, it is necessary to consider like-for-life as far as possible so the question is whether that other lease assumes that any rent-free period is to be disregarded.

Case Law

Which brings me to the application of case-law. Whether a lease expressly needs to specify what is to be assumed and disregarded at rent review might in some instances really only be for interpretative expediency, rather than necessity. Some case-law is the outcome of interpretation of ambiguuty. After a point has been decided, then to avoid reliance on case-law the lease draftsman will incorporate the principle expressly in the lease. But just because a point of principle is not expressly mentioned in the lease does not necessarily mean it should not be applied.

In Summary

Returning to the rent-free period, and the way things are going, landlords whose properties are facing lease renewals would be well-advised to include in their thinking and investment performance expectations the likelihood that on renewal the tenant would want a rent-free period.

Whether the cost of conceding could be recouped by including a ‘penalty’ payment should any tenant break clause be exercised is a matter for agreement. Since tenant desire to reduce property costs is ongoing, a tenant break clause that would if triggered then require  the tenant to expend the amount of the rent-free period on extrication could be construed as unlikely.

One must be careful. In a matter I am dealing with currently, involving evidence of a lease of 15 years with two tenant-only break clauses at 5 yearly intervals, the penalty payment is only applicable at the first break clause. Assuming the break clause a successful negotiating ploy in any event, also that trade is not as bad as having a break clause might suggest, the tenant gets the benefit of a few months rent-free to begin with followed by a free let-out clause 10 years later.

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