When leasing a commercial property, it’s important to know where your responsibilities as a landlord lie, and how you can protect your best interests as a landlord.
Some conditions within a lease are obvious – you would expect there to be information about rent and how it is paid. However, there are other areas that can easily trip you up if you sign an agreement that allows a tenant to do something that you would rather they didn’t – like leaving you without any rental income two months into the lease.
Below is an overview of the types of things to be aware of. This is by no means an exhaustive list, but should give you some pointers on the types of issues to carefully consider before signing on the dotted line when leasing out your commercial property.
Conditions in a commercial property lease
Setting a rental amount is the easy bit, but make sure that you include when the rent needs to be paid by and how regularly it needs to be paid in your lease. For example, if you would prefer rent to be paid quarterly, you will need to stipulate this, ideally including the day of the month that the rent would need to be paid on or by.
Ways that rent can be paid are also important to outline. If you’re not happy with a cheque, then stipulate that rent must be paid by BACS transfer or another method that you would prefer.
This is a popular area of contention for landlords and tenants in relation to both commercial and residential properties. It’s incredibly important to agree on the condition of the property before it is rented out. One of the most effective ways of doing this is to photograph the property and both sign under the photographs to say that they are a good representation of the state of the property before the tenant moves in. These can then be used as solid evidence of need for repair or redecoration if the property is left in a poorer state or is showing any damage when the tenant leaves. It’s at this point that you will be able to hold back some or all of the deposit that the tenant paid before moving in. Again, this would all need to be clearly stated within the lease’s conditions.
If you think that you might need the property back for your own needs, or have a close associate or even family member that’s waiting in the wings for the right time for them to move in, it makes sense to use a short-term lease so that the property isn’t just sitting empty in the meantime. However, it’s important that you carefully consider how long or short the amount of time is that you can commit to renting the property out for. It can be tricky to go back on a lease term without penalties, or even legal action in some cases.
Leaving a lease and break clauses
Following on from lease terms, if you do think that you would like to be able to move a tenant out before the lease comes to its end date, or if you would like to provide the option for a tenant to leave relatively flexibly, you will need a break clause. This will stipulate how exactly a lease can be terminated before it reaches its full term. For example, if a tenant has a lease for six years but wishes to leave after two because they need to downsize, if you have provided a break clause in their lease, it could say that this is possible – but only if they provide you with six months’ notice and leave the property in the same condition as they found it.
There are other ways that break clauses can be used to your advantage, as well as to make renting your property more attractive to tenants, so this is definitely one to seek some specialist legal advice about.
Taking on a tenant without a long string of glowing references can seem risky, especially if you haven’t leased your commercial property out before. Similarly, if the company that you are leasing to does not have the best credit rating, it can feel like a risk taking them on. For these reasons, guarantors can be used in commercial property leases to ensure that rent is paid when specified. When allowing a guarantor, it is important to remember that unless specified in your lease terms, they are only likely to be guaranteeing the obligations of the tenant as they were at the time that the lease was originally signed. If there are changes made to the lease, for example, if the tenant breaches any covenant by doing something like putting up an internal wall without permission, then the guarantee would usually become broken.
These are extremely helpful if you decide on a long-term lease and you find that half way through mortgage rates rise, leaving you with a deficit or leasing out a property with little or no financial gain. If you clearly define terms for rental reviews throughout the lease term, it is far more acceptable to review the rental amount in line with market fluctuations. This can save you money from disputes, or defending yourself if you decided to put the rent up without an official review.
Landlord communications, entry and notice
There are many reasons that you could prefer a certain form of communication to others. For example, if you work antisocial hours, or outside of the country on a regular basis, email may be the most effective and convenient way for your tenants to communicate with you. Similarly, if you need to get hold of them to check something at the property, or to arrange an inspection, it makes good sense to specify in the lease that if a message is left for your tenant, they must respond to you within a certain timeframe.
With regards to entering a property, you will need to provide your tenant with sufficient notice for it to be convenient for them. The notice period and how you would contact your tenant regarding entry to the property should be clearly outlined in your lease terms.
Termination of the lease sounds like another obvious one. You would expect a tenant to give notice if they wished to leave the property, but if the lease comes to the end of its term and there is no notice – what then? Will they leave, or do they want to stay on – and if so, how long for? Making sure that there is a termination notice period, either for you to advise that the lease is coming to an end and to specify the date that the tenant must leave the property, or for the tenant to advise you if they wish to leave or stay on at the end of their lease, is crucial to keeping track of comings and goings both in terms of tenants and cashflow.
It is also important to include conditions where you would terminate the lease, for example if your tenant breached the conditions of the lease or a covenant within the lease on more than one occasion.
Typically, tenants are made responsible for the upkeep and maintenance of the inside of the property, but specific liabilities should be clearly defined in the terms of your lease. These should include what happens when something needs repairing or decorating; the terms by which repairs and decoration can be carried out and who will pay for these actions.
If there is a service charge associated with the property, perhaps as a property that houses other businesses at the same time (like an office building), then terms of this and responsibilities for things such as cleaning, rubbish disposal, decoration and repairs should all be outlined as being covered under the service charge fees, or not.
If you are leasing a commercial property with items such as furniture or white goods included, you will need to specify whether those items should be insured under contents insurance by you or your tenant.
Sometimes if you don’t say that a tenant can’t do something, they will take it as free reign for them to do whatever they like. For example, not saying that any signage to be affixed anywhere on the premises, inside or outside the property needs to be approved by you and sourced by an approved supplier, could mean that the next time you visit your leased property, you might find signage affixed to surfaces without planning permission – which could put you in hot water. Internal signage may also cause damage to surfaces, which is another reason why it’s important to stipulate that a tenant advises you of where they would like a sign and what the sign is going to be like, in your lease terms.
Leasing a property with vacant possession means that the property will be completely empty of previous tenants and any moveable objects, including rubbish. This can also apply to partitioning in some cases, so make sure that you include whether partitioning will be removed before a new tenant takes up the lease in your lease terms.
If the new tenant finds something (or someone) on the property, they can claim that vacant possession was not granted, which in some cases can cause long-winded and expensive disputes.
Any other clauses
These are just some of the most common types of clauses that are used in commercial property leases. There are other clauses that can be used to protect yourself and your liabilities, depending on the type of property and the length of the lease.
Hopefully, it’s easy to see why it’s worthwhile using a specialist for your legal work with commercial property, as there are items you may either need to be wary of, or be able to use to your advantage, in a lease which wouldn’t necessarily be apparent to another type of property lawyer. For further information about leases and what the role of a commercial property solicitor would be when leasing your commercial property, visit Bray & Bray Commercial Property Law.
About the author:
Catherine Angrave is a specialist commercial property solicitor who specialises in all aspects of commercial property leases across a range of industries and sectors. An Associate Solicitor, Catherine works for regional law firm Bray & Bray Solicitors, which has four offices across Leicestershire.