5 Further points to consider when taking a Commercial Lease

May 30, 2017

In a previous post some of the legal aspects in negotiating and signing up to a commercial lease were considered. But as that post advised, leases are complex beasts with many interacting parts, so it is worth looking at some of the other common clauses a tenant can expect to come across.

Again, these clauses are not the most important or burdensome – the document should be looked at as a whole and negotiated to balance the needs of the tenant and landlord.  With that in mind, here are a further 5 clauses a tenant should be aware of when taking on a lease:

Insurance Provisions

Insurance provisions can be very complex and are worthy of a post of their own, but the following gives a flavour of what to expect.

Invariably, the commercial lease clauses relating to insurance will cover who insures, what they are insuring, and what happens when the insurance is drawn on.

If a tenant is taking a lease of the whole building, they may be required to insure. However, it is more common for the landlord to insure and charge the tenant. This cost will usually be defined in the lease as a rent, so the landlord has greater options of recovery if the tenant does not pay.

Because the landlord is insuring, they have control over what is insured and how much they are willing to pay; needless to say, they are insuring their asset, so they will not necessarily go for the cheapest option!

A tenant will want to ensure that there is a comprehensive list of risks covered and that the landlord is obliged to repair or rebuild the premises when the insured damage occurs. They will also need to ensure that if the building is destroyed, rent is suspended until they can resume occupation, and if the building cannot be re-built, the lease can be terminated. Tenants do not want to find themselves paying out for a property that no longer exists for the rest of the lease term!

Repair Covenant

Again, repair covenants can be very complex and full of pitfalls for the unwary tenant. While it seems fair for a tenant to keep the premises in repair, in law that can mean they have to first repair the property they have leased, then keep it that way. For example, if a roof is leaking, a tenant may be liable to replace it as part of their repairing liability under the lease – thus the landlord would benefit from a new roof as well as the rent!
As such, it is advisable for the tenant to have a schedule of condition created by a qualified surveyor. This way, any major repairs can be carried out by the landlord before the lease is taken, or the repair can be done by the tenant but the cost taken into account in the negotiation.

Usage Clauses

A tenant must ensure what they intend to do in the property is allowed under the lease. In large industrial estates this is not usually too much of an issue, and often the permitted use will be defined in accordance with the planning use classes.

However, often retail units will be restricted and only certain types of shops permitted. This allows the management company to ensure there is a good variety of outlets, or that they are consistent with the image of the area they manage. Obviously, a pound shop in a high end jewellery district would not strike the right note!

What is not so obvious is that at rent review time a surveyor will take into account what use is allowed by the lease to ascertain a market value; the more restrictive the lease, the fewer the potential tenants, and therefore the less the lease will be worth.

That said, usage clauses can usually be amended by an agreement with the landlord, but a very permissive clause will make the lease more valuable, particularly at rent review time. It is a good illustration of how a lease clause which apparently does one thing has a knock on effect.

Service Charges

Tenants must always be aware of any potential service charges. These charges are usually paid to a management company and will cover such things as maintenance of common areas and estate roads. These charge will be variable too, and may require the tenant to make large or unaffordable contributions if work to the whole estate is required.

An unsuspecting tenant may consider a property is within budget, without realising there are further hidden costs contained in the lease. Also see insurance clauses above!

Authorised Guarantee Agreements

Last but not least, an Authorised Guarantee Agreement (‘AGA’) is worthy of special note and caution, though the whys and wherefores are complicated. What you do need to know is that they are very common in commercial leases, are very ‘landlord friendly’ – in other words, they are not there for the benefit of the tenant.

When a tenant assigns the lease to a third party, one would naturally assume that their liability for it ends there, in much the same way that you are not responsible for the MOT of a car you have sold. The AGA however makes the outgoing tenant a guarantor for the new tenant, and so the landlord can pursue them for breaches of the lease (including repair covenants and rent) despite them having no other connection to the property.

Evidently, this provides great security for the landlord, but is no great benefit to the tenant who can be left on the hook as a guarantor for the remaining term of the lease. So why sign the AGA? In most cases the landlord will not provide permission to assign the lease without the guarantee, so the tenant is essentially compelled to enter into it.

In Summary

Once again, the brief notes above show how much there is to consider and negotiate when entering into a lease. AGAs alone serve as a useful warning against entering into a lease without due deliberation and knowing what clauses really mean.

Drafted well, leases can provide the certainty both landlord and tenant require to provide a productive relationship. But potential tenants should always ensure they know what they are signing up to and their interests are protected, and that means taking professional advice.

The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.

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