Commercial Landlord and Tenant

Generally speaking, it is unlawful to grant a lease of substandard property. This means a property whose energy performance certificate shows an F or G rating in respect of energy efficiency. There are some exemptions to the rules, for example, where the energy improvement works would devalue the property. Potential penalties for non-compliance are the issue of fines to landlords and the entering of details of the breach on a public register. Landlords should also be aware that the minimum rating of sub-standard property may well change in the future, exposing more properties to the regulations.

A commercial lease will contain a number of obligations that expose business tenants to liability for repairing a property, either directly, through obligations to repair the property, or indirectly, by requiring a business tenant of a multi-let building to contribute to the upkeep of the building via a service charge. Business tenants should ensure that they carry out surveys and enquiries at an early stage to assess their potential liability for repair and service charges and, if necessary, limit their liability through the lease terms.

Some transactions involving the acquisition or disposal of commercial leases become delayed or expensive due to protracted negotiations over lease terms or where problems with the property are encountered during a business tenant’s investigation of the property. We find that legal negotiations can be minimised if the parties agree clear terms at the outset. Commercial landlords can also avoid issues arising during a business tenant’s investigations by reviewing their portfolios to ensure that any issues are resolved before the process of granting the commercial lease begins.

In these circumstances business tenants will want to check their commercial leases for break options – unilateral rights to terminate the lease on a particular date. Alternatively commercial leases can often be assigned, or the property sublet in whole or in part, to mitigate the cost of the lease. In such cases however be aware that the landlord’s consent is usually required for assignment and subletting. The landlord may also agree to accept a “surrender” where it takes the commercial lease back (although landlords cannot usually be compelled to agree to this approach and may require payment to do so). We would always recommend considering the inclusion of break rights when you are negotiating the terms of the commercial lease and taking legal advice should your commercial lease no longer be required.

Most leases of commercial property set out in detail the circumstances in which the tenant can transfer the leases, grant underleases or carry out alterations.  The consent of the landlord will usually be needed but there may be a requirement that this consent cannot be unreasonably withheld.  An application to the landlord for consent will be needed and, if the landlord is willing to give consent, the terms of a formal “licence” will be negotiated.  External or structural alterations are often prohibited; whether this is the case will depend on the nature of the property and the terms of the lease.

Usually yes if the application is made during the term of the lease.  The landlord’s solicitors will often require an undertaking from the tenant’s solicitors to pay those costs. If consent is being sought for initial fitting-out works then it would be more usual for the parties to bear their own costs.

In leases of commercial property granted since the start of 1996 tenants are usually released from future liability when they transfer their leases.  However, a lease can require an outgoing tenant to enter into an “authorised guarantee agreement” when transferring the lease where the outgoing tenant guarantees the obligations of the next tenant.  This point should be agreed at heads of terms stage.

Usually not. The tenant would remain liable to the landlord under the provisions of the “superior lease” (i.e., the initial lease granted by the landlord to the tenant). There will be a separate party (the undertenant) in occupation of the property paying rent to the tenant under the new lease granted by the Tenant (the underlease)