Commercial Property – Leases
Aside from agreeing the level of the rent, this is often the most important question in any lease negotiations. A landlord will want you to take a long lease as this secures their rental income but you may not want to commit to a long lease on a new venture. However, if you take a short term and things go well, you may then find you have to relocate at the end of the lease.
Break clauses, options to renew and security of tenure can all provide greater flexibility for a tenant.
Break clauses (a.k.a. break options) give the tenant the right to end the lease before the end of the full term. They are a perfect solution where a landlord is pushing for a longer term than you are comfortable with, i.e. rather than just take a 10 year lease, take a 10 year lease with a 5 year break option. Most commonly, the clause will provide for the tenant to give not less than six months written notice of their wish to end the lease on a fixed date; the tenant must be up to date with their rent and the property must be in good repair. It is also possible to have multiple break dates or a rolling break option, i.e. the lease can be ended at any time on say six months’ notice. The landlord may also request the benefit of a break option but this is less common.
One drawback to break clauses is that if you have paid any Stamp Duty Land Tax at the grant of the lease, you do not get any form of refund when the lease is cut short.
Options to renew are effectively the reverse of break clauses because, rather than making a long lease shorter, they make a short lease longer. You might for example take a 3 year lease with an option to renew, meaning you could in fact have the property for 3 or 6 years as you wish, but you would not normally be able to renew more than once. In a similar fashion to break clauses, options to renew normally require the tenant to serve notice and not be in breach of the lease before the renewal lease is granted. There is also often a rent review to set the rent level for the duration of the renewal lease.
Options to renew avoid the risk of wasted Stamp Duty but there can be additional legal costs in documenting the renewal lease at that time.
Finally, security of tenure must be considered. This means the right of a tenant who operates a business from leasehold premises to continue to trade from the premises even if the formal term of the lease expires. You can either ‘hold over’ and just let the existing lease run on, usually with a rent review, or either the landlord or the tenant can apply for a new lease. This must be on substantially the same terms as the original lease but is subject to a rent review.
Landlords can exclude security of tenure before the lease is granted or they can, in certain circumstances, object to the holding over or new lease. These circumstances are prescribed by the legislation and, broadly speaking, relate to you having been a bad tenant or the landlord wanting to redevelop the property.
If you need advice or just want to discuss any of the above then please contact one of our commercial property solicitors.