Commercial Lease for a Restaurant

Explanatory Notes

Commercial Lease for a Restaurant

Introduction

This form of commercial lease is intended for use where a building, divided up into separate units, is to be let for a restaurant.The Commercial Lease for a Restaurant is based on the form of our Short-Term Commercial Lease.

Overall, this restaurant 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 agreement is generally landlord-friendly.
 
The key legal effect of a lease is the grant of a leasehold estate. This is called a demise – the right to possession of the premises for the term of the commercial lease. Beyond this, 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 it is always recommended to take legal advice – both for landlords and tenants before entering into a commercial lease.

The Permitted Use

It will be in the landlord’s best interests that the restaurant is well run to a high standard as this will enhance the value not only of the premises themselves but also of the building in which they are located., and in turn this will enhance rental values. A landlord may, therefore, want to add “high class” to the definition of “Permitted Use” in clause 1.1 of the restaurant lease agreement. The clauses set out in paragraph (a) of Part 6 of the Schedule may also need modification depending on the landlord’s requirements for the restaurant.

A landlord may also want to impose a restriction on the type of restaurant. There may be, for example, an existing Chinese restaurant in the building and so perhaps the landlord will want to exclude this type of restaurant for the protection of the existing tenant. This can be done by adding the words “but not a Chinese Restaurant” to the definition of “Permitted Use” in clause 1.1 of the 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 himself 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 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 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 restaurant lease agreement 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 restaurant 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 his legal ownership by producing copies of his 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 take 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 his 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 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 – 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 leases of commercial premises will require this certificate to be obtained under the Regulations, unless a valid Certificate is already in existence. There are financial penalties for the landlord if the Certificate is not obtained when it is required. The landlord should speak with one of the qualified providers for advice.
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 Lease

If the commercial lease is for a term of more than 7 years, then it 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 on line as well.

Details to be inserted on page 1 include:

Date – this should be the date upon which the commercial lease is signed by both parties.

Parties – the full name and address of each party should be inserted here. Where the landlord or tenant is a limited company, the registered office address of the company should be shown and the company registration number.

Specific Clauses:

1. Definitions.

There are a number of details to be completed here:

• The address of the building.
• The commencement date of the restaurant lease agreement.
• 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’).
• Opening hours – examples are given.
• Permitted use – further details may need to be inserted, as mentioned above.
• 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.
• 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 restaurant lease agreement.

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. 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.

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

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.

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 restaurant 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.

4.2 refers to additional obligations set out in Parts 5 and 6, and these relate to the use of the premises as a restaurant. 

Part 5 – Some of the Licences may already be in force when the commercial lease is granted and will continue. The “Premises Licence” from the Local Authority for alcohol may be an example of this. The Tenant (or the Landlord) may have to apply for new licences. There may be special requirements for music and other forms of entertainment. The definition of “Licences” is intended to be very wide.

Part 6 – As mentioned above, it will be in the Landlord’s best interests (as well, of course, as the Tenant’s) for a high standard to be maintained, and so this part of the Schedule sets out detailed obligations for the tenant to help achieve this. The provisions here may have to be adapted to cover the particular circumstances.

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

5. Landlord’s obligations.

These include 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 restaurant lease comes to an end.

7. Rent review.

This 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 in the UK. Where a rent-free period is agreed this clause makes it clear that, for the purposes of the rent review, such a 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-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 the landlord will need to take legal advice. 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 the case the landlord’s insurance ought to be arranged so as to cover him for loss of rent.

10. Expiry.

When the restaurant lease agreement comes to 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 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 his 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 a 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.
2. The tenant must sign a declaration in front of a solicitor or commissioner for oaths confirming that he has received the landlord’s notice. The form of declaration is attached.
3. The commercial lease agreement 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 to 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 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.

Completion

When all the details in the Restaurant Lease Agreement have been completed, along with the Schedules and plan, then the commercial lease should be executed by the Landlord. An exact copy should also be produced as the counterpart and this is executed by the Tenant. The Commercial Lease for a Restaurant and its counterpart should be dated as soon as the parties are ready for the commercial lease to be granted. The parties are then legally committed.