Common Lease Clauses: The term, security of tenure and lease security
When negotiating a lease, the parties will need to agree to the term of the lease, whether the tenant will benefit from security of tenure and whether the landlord requires additional security in support of the tenant performing their lease obligations.
Term
The term of the lease should have been agreed upon between the parties at heads of terms stage. As leases are generally seen as a liability and not an asset a shorter-term lease offers more flexibility for a tenant in uncertain times. One exception to this is where a Tenant is incurring significant fit out costs for their premises and therefore may want a longer-term lease as a result of its investment in the premises.
Security of tenure (the Landlord and Tenant Act 1954) (the 54 Act)
An important point to consider though is whether the lease is granted within the security of tenure provisions of the 54 Act. Leases will automatically have such protection unless the relevant provisions of the 54 Act are excluded. If a lease has 54 Act protection, this means that at the end of the term of lease a tenant will have an automatic right to remain in the property and to renew their lease on substantially the same terms.
If you are a landlord looking to obtain vacant possession at the end of a 54 Act protected lease, you will need to serve a notice to recover possession. If you want to recover possession of the premises, you will need to rely on one of the seven statutory grounds set out below:
- Ground a - The premises are in disrepair
- Ground b - There are arrears of rent
- Ground c - There are other breaches of covenant
- Ground d - Suitable alternative accommodation has been offered by the landlord
- Ground e - The tenancy was created by a sub-letting of part
- Ground f - The landlord intends to redevelop the premises
- Ground g - The Landlord intends to occupy the premises
The law in this area is complicated, and whether a particular ground of opposition can be used will depend on a variety of factors. If you intend to serve a 54 Act notice, we would strongly recommend instructing Property Litigation solicitors to assist in this regard.
Depending on the statutory ground used to recover possession, you may be required to pay compensation to the tenant, depending on the length of their occupation.
If a tenant vacates the property before the end of a 54 Act protected term, the lease will automatically come to an end. However, if the tenant remains in the property (and no 54 Act notices have been served) then the tenant will have a right to continue to occupy the property on the terms of the lease.
Historically, it has been the case that most shorter-term leases would be excluded from 54 Act protection and longer-term leases would benefit from the protection. In recent years however, there has been an increase in shorter term leases with 54 Act protection.
It is something a tenant will need to consider when negotiating terms for a lease, especially where:
- The location of the property is of greater importance such as pharmacy premises situated within a GP surgery; and
- Where significant sums are being spent on the fit-out of the property where the tenant would not want to be obliged to hand back the property to the landlord at the end of the term.
Lease Security - Guarantors and Rent Deposit
When negotiating terms for a lease you will need to consider whether the covenant strength of the tenant is sufficient to enable it to comply with the lease terms, including the requirement to pay the annual rent.
In addition to the obligations of the tenant under the lease, you may require the tenant to either put forward a rent deposit (typically three or six months' rent) which you can draw upon in the event of default by the tenant, or to provide a guarantor to the lease whom the landlord can pursue in the event of default. There are strict rules governing how a landlord holds the rent deposit once it has been transferred to them.
Such matters are a matter of negotiation between a landlord and a tenant. For more information on this, we have previously explained the provision and use of guarantees and rent deposits.:
If you are considering taking or granting a lease and would like further advice on common lease clauses and lease terms, please contact Kirsten Brown in our Healthcare team on 07467 220 900, or complete the form below.