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Five Things for a Tenant to Look Out for When Negotiating a New Lease of Commercial Property

on Thursday, 05 November 2015.

A practical guide of things for tenants to look out for when negotiating a new lease of commercial property

Negotiating heads of terms for a lease of a new premises, or the renewal of an existing tenancy, can be a complex process and the consequences can be grave if the tenant gets it wrong.

In this article:

  1. Money
  2. Repairs
  3. Assignment, underletting and sharing
  4. Use
  5. Break options

Lease terms are generally far shorter nowadays than they were a few years ago. It is rare now to see a lease of more than 20 years and much more usual to be dealing with leases of 5-10 years in length. The continuing trend towards shorter lease terms means that tenants are having to deal with decisions regarding new leases on a more regular basis.

Heads of terms for a lease can include numerous different items (and certainly far too many to be adequately covered in an article of this length). Below are our suggestions for the top five things that a tenant should look out for when negotiating heads of terms:


1. Money

Rather obviously, a tenant needs to have as much certainty as possible as to its financial outlay over the term of the lease. This not only includes the rent, service charge and insurance rent payable to the landlord, but also rates, utilities and even moving costs.


2. Repairs

A full repairing and insuring (or 'FRI') lease can be extremely onerous for a tenant and can mean that the tenant must keep the premises in a better condition that it was at the start of the lease. The basic position here is 'buyer beware' and it is highly recommended that a tenant obtain a survey of the premises prior to committing to a lease. The survey should highlight any current disrepair and also give the tenant an idea of the cost of complying with its future repairing obligations.

If the survey reveals particular items of disrepair the tenant can also then seek to either limit its repairing liability by reference to a schedule of condition (meaning the premises must be kept in no worse condition than they are in at the start of the lease) or by excluding its liability for certain items.


3. Assignment, Underletting and Sharing

It can be important, especially in longer leases with no break options, for tenants to be able to part with possession of all or part of the premises during the term of the lease. Close attention should be paid to the these clauses (known as 'alienation' clauses) to ensure the lease does not adversely restrict the tenant's ability to adapt to its changing business needs.


4. Use

A tenant must be sure that it is able to use the premises for its intended purpose. There are two stages to this. First, the lease must permit the intended use. Often this is by reference to a specific Use Class under the Town and Country Planning (Use Classes) Order 1987. However, most leases state that the landlord gives no warranty that the premises may be used for the permitted use and, secondly, it is therefore important to check the local authority's records to ascertain what use is permitted under the planning regime.


5. Break Options

Break options are frequently discussed when heads of terms are being negotiated. A break option can be very useful for a tenant in allowing them to exit a property early if the need arises. There has been a lot of case law in recent years concerning compliance with break conditions and a tenant should always seek to ensure that any such conditions are kept to a minimum. The Lease Code recommends the only conditions that should apply to a break option are, that on the break date:

  1. The principal rent is up to date
  2. The tenant gives up occupation
  3. There are no continuing subleases in place

Break conditions are generally interpreted strictly by the courts and it is therefore in the tenant's interest to agree to there being no break conditions if possible (or at least ensure that any conditions can be easily complied with by the tenant). A break option that is invalidly exercised can have drastic implications for a tenant who then finds themselves committed to a lease for the remainder of the term.



Contact us

We have a specialist team of commercial property lawyers that can help you understand and negotiate the terms of your lease. For more information, please contact Jon Durham in our Commercial Property Law Team on 0207 665 0931, or make a quick enquiry below.