Commercial Lease Agreement (Short Term)

Explanatory Notes

Commercial Lease Agreement (Short Term)

INTRODUCTION

This Short Term Commercial Lease form download is intended for use where a building, divided up into separate units, is to be let for commercial purposes – offices, etc.

Overall, this Commercial Lease Agreement is short as commercial leases, go but it contains the main provisions that appear in commercial leases of this type. Though reasonably even-handed, this Commercial Lease is generally landlord-friendly.
 
The key legal effect of a commercial lease is the grant of a leasehold estate. This is sometimes called a demise – the right to possession of the premises for the term of the commercial lease. Beyond this, commercial leases create a number of other legal effects, including obligations to pay rent, obligations to maintain and specified remedies.

Landlord and tenant law is a complex area and legal advice is always recommended – both for landlords and tenants before entering into a commercial lease.

ENQUIRIES BY THE LANDLORD

Before granting a commercial lease, a landlord should make some checks on the prospective tenant – by obtaining references and by trying to satisfy themselves as to the financial capacity of the proposed tenant. Although this Commercial Lease Agreement does not contain any provision for a guarantee, it is not uncommon for a commercial lease to a limited company, especially one which is owned and run by its shareholders, to require that one or more directors should personally guarantee the payment of the rent.

ENQUIRIES BY THE TENANT

The tenant will want to be certain about the following:

1. The condition of the premises - the Commercial Lease Agreement provides in clause 4.1.2 that the tenant has to carry out repairs. The tenant will not want to carry out repairs in respect of defects which existed before the Commercial Lease was completed, otherwise these could amount to improvements for the landlord's benefit. The tenant should, therefore, survey the premises and record in writing, and perhaps with photographs, what condition the premises are in before completing the Commercial Lease.
   
   
2. Planning position - the tenant should ascertain that planning permission exists for the "Permitted Use" and it may also be advisable for the tenant to ascertain that local authority consents have been given for the construction of the building. There may be conditions imposed by the local authority which will be binding on the tenant.
   
   
3. The landlord's legal title - the tenant should ensure that the landlord is the owner of the building and is, therefore, in a position to grant the commercial lease. The landlord's legal title may be registered at the Land Registry and, if so, a copy of the Register for the title should be obtained with a copy of the title plan. If the title is not registered, then the landlord may have to prove their legal ownership by producing copies of their deeds. In addition, if the landlord has charged or mortgaged the building to secure a loan, then the consent of the lender will probably be required. There may be other questions relating to the landlord's title and it may be necessary to seek legal advice on this particular aspect.

TENANT'S STATUTORY RIGHTS TO A RENEWAL

In England and Wales, under the Landlord and Tenant Act 1954, a business tenant is entitled to have their commercial lease renewed at the end of the term, except in certain specified circumstances; in particular, when the landlord wants to redevelop the site. It is, however, possible to exclude the provisions of the Act from the Commercial Lease so that the tenant does not have any protection.

Until recently this involved an application to the court, but new regulations were enacted in 2003 which avoid the need for a court order. These are covered in our form of Commercial Lease Agreement – see the more detailed comments under clause 14, below.

CERTIFICATES AND REPORTS

The following may also be required:

1. An Energy Performance Certificate - the grant of most commercial leases will require this certificate to be obtained under the Regulations, unless a valid EPC is already in existence. There are financial penalties for the landlord if the EPC is not obtained when it is required. 
   
2. An Asbestos Survey Report - most commercial premises will require this report to have been done. The landlord may already have a report for the building. If not and a report is required, then the tenant should ask the landlord to obtain one from one of the qualified surveyors. 
   
3. A Fire Risk Assessment - the tenant should ensure that the building, including the premises, has been assessed and ask to see a copy of the report.

NOTES ON THE FORM OF COMMERCIAL LEASE

This Commercial Lease is for a term of less than seven years. If the commercial lease is for a term of seven years or more, then the commercial lease will have to be registered at the Land Registry. The Land Registry prescribed clauses should be included at the beginning of the Commercial Lease Agreement. The Land Registry web page (www.landregistry.gov.uk) is very helpful and there are a number of leaflets online as well.  

SPECIFIC CLAUSES

1. Definitions.

There are a number of details to be completed here:

• The address of the building
• The commencement date of the Commercial Lease.
• The interest rate, i.e. the rate of interest payable by the tenant on any late payment of rent (or service charge). This may be a fixed percentage or one that is variable by reference to the base rate (e.g. '3 per cent per annum above the Bank of England Base Rate').
• Details of the premises (e.g. "the premises comprising 100 square metres on the third floor of the building").
• The term, i.e. duration, of the commercial lease with the commencement and expiry date.
• The rent: this will normally be an annual sum and we have two alternatives – either inclusive or exclusive of service charges. Note, also, the wording in square brackets relating to a "rent free period". Such provisions are occasionally agreed by parties (e.g. where a landlord needs to let property in a 'tenants' market' or where the tenant has agreed to carry out remedial work to the premises and insists upon a rent free period in return). 
• Deposit: this may be required by the landlord on signature and clause 3.5 deals with the deposit in detail.
• Rent review dates (e.g. if there is a five-year commercial lease, it might be subject to review at the end of the second year and annually thereafter).
• Permitted use: the details need to be inserted here.
• Rights and reservations: these are contained in the Schedule.
• Service charge and services: the wording needs to be tailored to particular circumstances and, in the case of the services, it may be better to list them in the Schedule – hence the alternative wording.

2. Grant of commercial lease

This sets out the basic agreement – namely that the landlord will grant the Commercial Lease under the terms set out in this document.

3. Rent and other payment

It is usual for rent to be payable in advance in quarterly – i.e. three monthly – instalments and the details need to be inserted here in the Commercial Lease Agreement. The first instalment may not be for a full three months and therefore this will need to be specified. Note the second alternate wording which will be suitable where a rent free period has been agreed.

Clause 3.2. applies where the service charge is payable in addition to the rent.

Clauses 3.3. to 3.5 make it clear that late payment of rent will entitle the landlord to interest and they also deal with the method of payment and the fact that the tenant cannot make any deductions from payments which are due.

Clause 3.6 deals with the deposit, where this is applicable.

4. Tenant's obligations.

This clause sets out the basic rules to be adhered to by the tenant during the commercial lease and includes such matters as keeping the premises clean, repairing any damage which is caused, complying with fire, health and safety regulations, and complying with the regulations governing the building which are imposed by the landlord, etc.

The use of the premises is restricted to the permitted use.

Clause 4.2 deals with the charges for which the tenant is going to be directly responsible.

5. Landlord's obligations.

This clause includes the obligation to keep the building insured and in good repair and to provide other services, where applicable.

6. Alterations.

Any alterations to the premises which are let will normally require the landlord's consent and this is dealt with in clause 6. Clause 6.3 makes it clear that the premises must be reinstated into their original condition when the Commercial Lease comes to an end.

7. Rent review

This clause deals with the procedure for agreeing a new rent and the possible appointment of an expert, if there is disagreement. The name of the organisation to appoint the expert needs to be inserted in 7.2. This could, for example, be the Royal Institution of Chartered Surveyors. Where a rent free period is agreed this clause makes it clear that, for the purposes of the rent review, such rent free period is to be ignored.

8. Termination

The landlord has the right to terminate the commercial lease and recover the premises if the rent or service charge is not paid on time or if the tenant commits any other breach or goes bankrupt. Note the alternative wordings in square brackets at clause 8.1.2 relating to the extent of a breach that will entitle a landlord to terminate. The precise wording will sometimes be the subject of pre-commercial lease negotiations between the prospective landlord and tenant.

If such a situation occurs, recovery of possession my not be as straightforward as the wording of this clause suggests and legal advice will be required by the landlord. Indeed, any signs of a problem with a tenant should be monitored and lawyers consulted sooner rather than later. The landlord should not attempt to take over occupation of the premises or to evict the tenant without taking legal advice first.

9. Suspension of rent

This would only apply if the property is damaged by an insured risk - in which case the landlord's insurance ought to be arranged so as to cover them for loss of rent.

10. Expiry

When the Commercial Lease comes an end, the premises must be handed over in the same condition as when the commercial lease commenced (fair wear and tear excepted). Clause 10.2 provides a mechanism for resolving a dispute between landlord and tenant as to whether building/decoration works are required (or the nature/extent of any works required) at termination. A surveyor is to be appointed to determine whether works are required and if so the nature/extent of those works. It may be advisable for the landlord and tenant to agree a set of photographs of the premises as at commencement date so as to reduce the scope for dispute later and to assist a surveyor appointed to resolve any dispute. Note the suggested alternative wordings as to liability for meeting the surveyor's costs.

11. Assignment and sub-letting

There is a restriction on both assignment and sub-letting. In spite of this clause, it is always possible for the landlord to give consent should this be requested.

12. Disputes and governing law

As drafted, this Commercial Lease Agreement is governed by English law and disputes are referred to the courts.

13. Notices

This sets out the procedure for notices which have to be served in accordance with the terms of the Commercial Lease.

14. Statutory matters

There are some technical points here which apply where the commercial lease is granted in England. In particular, 14.1 is to be noted.

Under the Landlord and Tenant Act 1954, a business tenant is entitled to have their commercial lease renewed at the end of the term, except in certain circumstances; in particular, when the landlord wants to redevelop the site. It is, however, possible to exclude the provisions of the Act so that the tenant does not have any protection.

Until recently this involved an application to the court but new regulations were enacted in 2003 which avoid the need for a court order.

Instead, there are now three specific requirements if the tenant is not to obtain security of tenure at the end of the term:

1. The landlord must give notice to the tenant in a prescribed form at least 14 days before the tenant enters into the tenancy or becomes contractually bound to do so. The form of notice which contains a 'health warning' is attached to the Commercial Lease Agreement.
   
   
2. The tenant must sign a declaration in front of a solicitor or commissioner for oaths confirming that they have received the landlord's notice. The form of declaration is attached to the Commercial Lease Agreement.
   
   
3. The commercial lease must refer to the above procedures as having being complied with and confirm that the landlord and tenant agree to exclude the security of tenure provisions in Sections 24 to 28 of the Landlord & Tenant Act 1954.

It is, in fact, possible for the notice to be served less than 14 days before the new tenancy. But if sections 24-28 are to be effectively excluded, the notice must still be given and the tenant must sign a statutory declaration in front of a solicitor or commissioner for oaths before the tenant goes into possession or becomes contractually bound to take up the commercial lease.

Clause 14.1 should be omitted if the landlord does not want to take advantage of the right to exclude sections 24 to 28.

14.2 excludes the operation of the Contracts (Rights of Third Parties) Act, the effect of which might otherwise be to give certain third parties the benefit of provisions in the Commercial Lease.