The bias to the landlord should not be under-estimated, for example, at RENT REVIEW if the lessee is faced with a large increase the one thing he cannot do is walk away from the lease since he is committed to it for the balance of the term. In addition, some or all of the value of his business may be related to its location – which in turn is dependant on the right to occupy. Hence the full impact of COVENANTS and other terms should be examined before the lease is signed – the only time the parties interface on something approaching equal terms.
No lease should even be considered unless the rent is roughly in line with rents in the area. Whilst special features may support a higher rent, care needs to be taken to avoid creating a precedent for increased rent which could affect all neighbours.
Checklist
1. Resist a lease term exceeding (say) ten years unless the business can plan that far ahead. If a short-term is resisted – request an option to break it either half way through or on an ongoing basis. Options should ideally be operative after a review has been agreed since the lessee will then know their future commitment and if the terms of trade in the locale have moved against them can bring their commitment to an end via the option.
2. Fully understand and comply with all covenants to protect any option to break, since this may usually only be validly exercised provided the lessee has complied with them.
3. Resist any requirement for sureties and personal GUARANTEES. If these are inevitable keep their time span short e.g. terminate after two years or at least at first rent review
4. Commission a full structural survey. Insert a schedule of condition in the lease and seek to restrict repairing and redecoration to the level shown.
5. Itemize any inherent defects in the property and clarify obligations.
Many landlords will refuse to exclude such items from a repairing obligation but it is worth at least asking.
6. If the premises are not in a state suitable for the lessee’s occupation, try to agree a rent free period during which work customizing the premises can be undertaken.
7. If lessee’s works (to customize the unit to suit its occupation and operation) are required, seek permission of the landlord. If the lease is already signed, a deed of variation may be required. However, it may be possible to gain agreement by sending two copies of the plans asking the landlord to sign and return one copy as consent. The signed plan should be kept safely with the lease – since it amends it.
8. Try to avoid any obligation to remove lessee’s works by the end of the lease and particularly to reinstate the property (if not, three sets of costs could be involved: the works themselves, removing the works and then making good and reinstating the property to the original layout).
9. Some landlords may wish to carry out the fitting out works themselves (particularly if they enhance the value of the property generally) or where the lessee cannot afford the works. If so, the landlord may wish to rentalise the cost of the improvements. The extra payment should be separately determined and charged from the rent and, at review, only the rent should be re-assessed.
10. If the lessee funds the works, ensure any enhancing value of such works are excluded from the valuation of rent at review. This agreement should always be specific and recorded in writing.
11. Resist rent reviews being required at a greater frequency than five years – this period is usually fair to both parties.
12. Resist upwards only rent reviews (UORR). That rents will always rise is a fallacy – they are a product of demand and supply and an UORR unfairly denies the effect of market forces.
13. Constantly seek evidence of other rents in the locale. Reviewing the rent is not purely a matter of negotiation and arbitration.
14. Resist penal interest charges on late payment of additional rent when under review.
15. Stipulate the wording and format of a memorandum for recording a rent review (see RENT REVIEW) in the lease – to avoid being charged for its preparation.
16. Stipulate that in the event of a lack of agreement re. rent review it will be determined by an expert rather than an arbitrator. It should be preferable that someone – an ‘expert’ – knowledgeable about the property market makes the decision having listened to such arguments.
17. Resist any requirement to keep an agreement to review the rent confidential. It is in the interests of lessees that everyone knows what rents are being charged in the neighbourhood.
18. Consider whether to ask for a restricted use clause. Whilst this could suit the subject lessee (and possibly hold the rent down at review) this could be a problem should the lessee wish to assign the lease.
19. Resist any suggestion that a restricted use should be ignored in review calculations. Restricted use will normally reduce the value of the lease and hence the rent. Conversely a restricted use may militate against ease of selling the lease.
20. Resist the imposition of time limits for the agreement of a rent review – deadlines can place a greater pressure on the lessee than on the landlord.
21. Repairing clauses can be very onerous. Resist any wording which requires the lessee to ‘put and keep’ the premises in a proper state of repair. The word ‘put’ imposes a wide duty which could involve the lessee being responsible for improving the state of repair over and above the level when the lease was granted. ‘Keep repaired’ is fair to both parties.
22. Check the landlord’s right to serve a ‘wants of repair’ (DILAPIDATIONS) schedule and resist the lessee paying for its preparation. Such a schedule should always be checked to ensure only items properly demanded are included.
23. Stipulate there should be no contingent liability on assignment for the failure of a subsequent lessee – the Privity of Contract (PoC) rule. For post 1996 leases, landlords will usually require an Authorized GUARANTEE Agreement (AGA) to be entered into by an assigning lessee, which to some extent reinstates the PoC liability.
24. If contingent liability or an AGA is required, insist on the right to underlet the whole property. If an assignee fails, the original lessee has liability for losses but no right to re-enter the premises. However if the lessee underlets and their tenant fails, they should be able to re-enter the premises and use it themselves – or find a new sub-tenant.
25. Creating an underlease and/or assigning the lease requires the landlord’s consent. Insist that the basis of the landlord’s consent is ‘not to be unreasonably withheld’ and this wording is in the lease.
26. Check who is responsible for INSURING – and what are the covers required. If the landlord insures, insist that the lessee’s interest be noted on the policy.
27. Rent is due on the dates specified in the lease – and must be paid on that date whether demanded or not. Check calculations particularly following a review and to ensure the benefit of any rent free period.
28. Ensure the method of calculation of apportionment of any shared services is stipulated, that such services are provided (and applicable to the subject premises) and that charges are not payable for services not provided.
29. In premises with multiple occupation ensure that should other units be empty any costs for shared services are not borne by lessees in occupation. It is the landlord’s problem if there are empty units.
30. Check all lease COVENANTS to be given by the lessee, not only for legal reasons, but also for their practical impact on the lessee’s business. This is best done by the lessee themselves rather than advisors.
Term
Landlords will normally prefer to have a longer rather than a shorter lease since, providing the current lessee complies with covenants, the cost of finding a new lessee is minimized. Lessees probably have the reverse preference and, if pressed to take a longer term than they wish, lessees should insist on an option to break.
Thus, if the term is 15 years, the lessee might require an option to break the lease after (say), five and ten years. If that option is exercised then the lessee