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Country - England & Wales
Commercial Leases
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A. SOURCES OF LEASE LAW
Applicable legislation
Leases are generally governed by case law with some supplementary statutory provisions, particularly in relation to business leases (Landlord and Tenant Act 1954), land registration (Land Registration Act 2002) and land taxation.
Additional rules apply to residential tenancies but these are outside the scope of this document.
Do any specific rules apply to commercial leases?
Generally parties are free to contract as they wish. Where statutory provisions apply, there are sometimes restrictions on contracting out of these. In particular, the Landlord and Tenant Act 1954 provides security of tenure for business lessees which can only be avoided by means of a special procedure.
Do different regimes apply to leases of commercial premises depending on the use of the premises by the lessee (offices, warehousing, industrial, retail)?
While there are no statutory differences there are differences in practice, particularly in the case of retail leases. Retail lessees may be subject to additional obligations which exist for the benefit of the shopping centre such as obligations to trade during certain hours. Lessors may also impose provisions to ensure a mix of lessees.
B. DURATION AND TERMINATION OF LEASES
Is there a minimum or maximum obligatory term?
No, and very long leases (for example 999 years) are quite common, normally granted for a one-off upfront premium rather than at a market rent. For market rent leases, terms are much shorter (10 to 15 years is common). The current trend in the market is for a reduction in term length.
Does the lessee have a right to renew the lease upon expiry of the initial contractual period?
There is a right to renew only if the lease provides for this or if the lessee has security of tenure (see below).
Do lessees enjoy security of tenure (i.e. the right to remain in occupation after their lease expires)?
Where a lessee is actually occupying premises for business purposes, statute grants them security of tenure unless the relevant provisions have been excluded at the start of the lease.
If the lessee has security of tenure, the lease will not end following its contractual term and the lessee will be entitled to a new tenancy unless the lessor can show grounds to oppose it, in which case compensation may be payable.
Do leases involve a lengthy procedure for the effective recovery of possession?
Leases invariably contain a provision allowing the lessor to terminate on non-payment of rent or breach of the lease (in the case of market rent leases, the lessee's insolvency is also usually grounds for termination). Normally, the lessor will seek a court order to recover possession of the premises but this can take several months.
Courts nearly always allow a lessee to rectify a breach and retain the premises. For example, if the lessee pays any rent arrears then the court will normally allow them to stay in the premises unless they have a long history of rent arrears.
Can government/local authorities require the compulsory termination of a lease?
Yes, local authorities have certain rights to acquire property on a compulsory basis and this includes property held under leases. Compulsory purchase powers may only be exercised on certain grounds, such as to enable new developments. The lessee will receive the market value of their interest in the property and may also be entitled to additional compensation.
Is there a preferential right of acquisition?
Parties are free to contract as they wish but pre-emption rights are not particularly common.
C. RENT AND COSTS
Are variable rental agreements common?
Where leases are granted for more than five years, it is standard practice to provide for a rent review in every fifth year, linked to the market rent that would be payable for a lease of the property on similar terms. Such provisions generally provide for the rent to be reviewed upwards only, although statutory provisions are proposed that restrict the imposition of upwards only reviews.
The exact basis for rent review is generally complex and the valuer is required to make certain assumptions and to disregard certain matters. Modern rent reviews have existed for 25 to 30 years and during that time a significant amount of case law has developed which valuers must take into account.
Rents linked to turnover are also sometimes agreed.
Most common indexation
Where the parties do not wish to include an open market rent review in the lease, or in the case of leases of less than five years, they will sometimes agree to link the rent to the Retail Prices Index or (less commonly) provide for fixed increases.
Who usually pays the common expenses?
Except in the case of very simple developments, a service charge will normally be established. Each lessee pays a proportion of the service charge based on the size of the unit in relation to the rentable space in the whole building. Normally, certain expenses will be excluded from the charge, such as the initial development of the building.
The service charge may be capped particularly if the space being let is not a new building.
The lessor will also pass on the costs of insuring the building to the lessees, in the same proportions as the service charge.
Are there any other expenses connected with the lease?
Stamp duty land tax (SDLT) is payable by the lessee on completion or occupation of the unit, whichever is earlier. The charge is 1% of the rent payable during the lease term, subject to discounting and a tax-free allowance for each lease.
Lessees will normally pay business rates to the local authority. The charge is calculated on a proportion of the rental value of the premises.
Services such as electricity, water etc. are usually purchased by the lessee directly from suppliers although this may not be the case in a large development.
Which indirect taxes apply?
VAT at 17.5% is payable only if the lessor elects to charge VAT. The lessor may choose to charge VAT in order to recover VAT on expenses. The whole building must be subject to VAT and the election is irrevocable after an initial period.
D. OBLIGATIONS OF LESSOR AND LESSEE
Who is responsible for the different works on the premises?
In a multi-let development, the lessor will repair and maintain common areas and the structure of the building. Lessees are responsible for repairing the interiors of their individual units.
Can the lessee alter or improve the premises?
Most leases limit the lessee's rights to alter or improve the premises. Structural alterations are frequently prohibited, particularly where the lessee only leases part of the building. Non-structural alterations normally require the lessor's consent, although statute law requires the lessor to give consent unless it can be reasonably withheld. On termination, the lessor may require any improvements to be removed to avoid having to pay the lessee compensation.
What restrictions are there on the lessee's right to use the premises?
Leases normally specify the permitted use of the premises. Specific activities which may cause a nuisance are also prohibited. In addition, the lessee will be restricted by planning law to a use which has been approved by the planning authority or which corresponds to past uses of the property.
Is there a right to transfer the lease?
Under English law, a lease is an estate in land, so it is legally possible to transfer it to another. The lease will usually state that any transfer requires the consent of the lessor, although statute requires that such consent should not be unreasonably withheld or delayed. If the lease was entered into after 1995, the transferor will remain liable under the covenants in the lease during the ownership of the transferee, but not its successors.
Is there a right to sub-let the premises?
Parties are free to contract as they wish, although if the lessee is required to seek the lessor's consent, statute requires that this is not unreasonably withheld or delayed. Leases usually contain detailed stipulations as to the areas that can be sub-let and the rents for the sub-letting.
What are the usual guarantees?
Parties are free to contract as they wish. The lessor may ask for a guarantee from the lessee's parent company, a bank guarantee or a rent deposit (usually not more than one of these). Deposits for breakages, damage etc. are not normally provided in the case of commercial lettings.
E. PARTICULAR TYPES OF LEASE
Do office leases have any particular characteristics?
Office leases will not normally contain lessor's pre-emption rights or turnover rents, but will generally correspond with the other characteristics set out above.
Do retail leases have any particular characteristics?
Retail leases may have turnover rents where all or part of the rent is determined by the profits of the store.
They may also have provisions enabling the lessor to maintain a suitable mix of tenants, for example, pre-emption rights and exclusive rights to sell particular products.
Retail lessees may be subject to obligations which exist for the benefit of the shopping centre as a whole such as an obligation to open and trade during specified hours and to contribute towards the marketing of the centre.
Although the lessor will maintain the structure and exterior of the premises, a retail lessee may be given the right to maintain its own shop front in its usual trading style.
Do hotel leases have any particular characteristics?
Hotel leases are similar to office leases, except where they are located in shopping complexes where they may have more of the characteristics of a retail lease.
Hotel leases often contain detailed provisions relating to the management of the property. Alternatively, provisions for management may be set out in a separate contract with a dedicated hotel management company.
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