Entering into a commercial lease exposes a tenant to a number of overheads and liabilities.  Equally, from the landlord’s point of view, investment in a commercial property for letting generates income and the landlord will need to be certain that this asset is protected and that the incoming tenant is able to meet its obligations under the lease.

It is important to get matters off on the right foot and, to achieve that aim, a little time taken at the start of a transaction to produce a detailed set of Heads of Terms (HOTs) is recommended and pays dividends for both parties.

In last month’s article we looked at the scope of and issues raised in relation to rent and other financial charges; whether financial security is required by way of guarantor or rent deposit; term length and break options; security of tenure and the repair covenant.

This month we will look at the terms relating to alienation, alterations, insurance, rent review, permitted use and rights/reservations:

Alienation

As this clause governs how a tenant will be able to deal with the Property if no longer required for business purposes, it is important to get it right.  The balance is between giving the tenant enough flexibility for the needs of its business, whilst allowing the Landlord sufficient control to protect its investment:

• A tenant’s minimum requirement should be the right to assign or underlet the whole of the Property during the term. This will be subject to the Landlord’s consent (not to be unreasonably withheld or delayed);
• The landlord is entitled to withhold consent under certain circumstances which must be detailed in the Lease, commonly:
  • arrears of rent;
  • material breaches of covenant;
  • the assignee is of insufficient financial standing and less substantial than the tenant and/or allowing the assignment would have an adverse impact on the investment value of the property;
• In addition, the landlord may specify certain conditions within the Lease as a prerequisite to the grant of consent:
  • The tenant provides an Authorised Guarantee Agreement;
  • The assignee provides a personal guarantee/parent company guarantee/ rent deposit;

Where the disposal is via underletting:

• The rent reserved must be equal to the subsisting annual rent;
• The underlease must contain the same terms save for the length of term;
• The underlease must be excluded from the Landlord and Tenant Act 1954;

Further considerations for the alienation clause:

• Assignment of part of the Property should routinely be prohibited. Underletting of part may be considered where this is appropriate to the Property;
• Group company sharing may be permitted if so required by the tenant;
• The grant of concessions/franchises may be permitted where appropriate.

Alterations

Structural alterations will routinely be absolutely prohibited and a landlord will want to secure this restriction.  For a lease of a whole building external alterations should also be prohibited.

If the above does not work for a tenant this must be negotiated at an early stage before the lease is completed.

• Internal structural – the landlord will want to prohibit this absolutely. Any structural alterations can be picked up in the licence for initial fit out works;
• Internal non-structural alterations – these should be permitted with the landlord’s consent acting reasonably;
• A tenant should try to get a concession from the landlord to the installation of internal demountable partitioning without consent. This will give options to the tenant in terms of layout without the need to constantly refer back to the landlord.

Reinstatement:

• The landlord will insist on full reinstatement at the end of the term to the landlord’s reasonable satisfaction;
• The landlord may wish to have discretion as to whether the tenant undertakes reinstatement works;
• Reinstatement also ties in with the repair clause (please see comments in Part One of this series).

In terms of decoration:

• Every 5 years for external surfaces;
• Every 3 years for internal surfaces;
• AND - in the last year of the term save where decoration has been undertaken in the preceding 12 months;
• The landlord will want approval of the colour in last year of the term.

Insurance

• The landlord will want to retain the obligation to insure in order to protect its asset;
• The tenant should be responsible for paying the insurance costs to the Landlord;
• The insurance should cover full reinstatement, building and miscellaneous costs and loss of rent for 3 years;
• Upon the occurrence of damage the rent should be suspended for the duration of the period for which loss of rent insurance is maintained;
• Parties should consider a termination provision in the event that the landlord has been prevented from reinstating the property by the expiry of the loss of rent period. For the tenant’s protection the right to terminate should be mutual.

Rent Review

• Consider the frequency of rent review – every 5 years?
• Decide on the basis of the rent review – there are 2 standard approaches:
  • Rent review in line with the Retail Prices Index;
  • Rent review in line with open market values at the date of review;
• Rent review will be upwards only to the higher of the rent payable at the review date and the reviewed rent. This protects the landlord in a falling market. It is accepted as the commercial standard;
• The tenant should press for a cap on increases, for example capped at 5% of the passing rent. This will protect the tenant in a rapidly rising market;
• Where the tenant has a cap the landlord may want to impose a collar i.e. rental increases will be no less than a certain percentage;
• A rent review clause should include provision for:
  • payment of back rent following determination (interest should be at base rate only as this is a no fault situation);
  • dispute resolution in the event that the parties cannot agree the level of reviewed rent.

Permitted Use

• Planning permission will dictate the permitted use;
• Change of use should be permissible with the consent of the landlord, which shall not be unreasonably withheld;
• Any change of use must have planning permission;
• Include standard provisions prohibiting use for casino/   prostitution/ gambling/ nuisance etc.
• Both parties may want to consider exclusions, for example:
  • The landlord shall be entitled to refuse consent to a change of use where it would be detrimental to a tenant mix in a shopping precinct or parade;
  • The landlord shall be prevented from letting another unit within a shopping centre/parade for the same use as the tenant.
• The enforceability of such exclusions is a moot point and needs detailed consideration.

Rights and Reservations

ACCESS

• The landlord will grant rights for the tenant to access the property across the estate/building
  • is vehicular access required?
  • should the rights be exercisable only at certain times?
  • is the access across a marked road/path or generally?
• The landlord will grant the tenant rights over the building/estate and the Landlord will reserve rights across the property:
  • Of access for inspection, maintenance and repair purposes;
  • Of mutual support and protection.

SERVICES

• Grant and reserve a mutual right to use services for the landlord through the property and the tenant through the building or estate:
  • All utilities – gas, water, electricity, data, sewage;
  • At all times throughout the term;
  • A consequential right to enter and repair such conduits causing as little damage as possible making good damage caused.

SCAFFOLDING/SIGNAGE

• Consider whether either party need a right to erect and retain scaffolding to undertake repairs;
• Will either party need a right to erect and maintain signage?
• The landlord will require a right to add to the building and estate notwithstanding that the access of light and air to the property is reduced;
• In connection with the above, if development is planned will a crane oversailing licence be needed?

CAR PARKING/BIN STORE

• A tenant may require rights to park – will this be general or in allocated spaces?
• Is there a mutual bin store the tenant will need to access to use?
• In relation to deliveries, will a tenant need rights to use loading bays/turning circles – at prescribed times?

Ortolan will happily provide initial advice on proposed HOTs at the early stage of a transaction and can provide a specification for a standard and/or bespoke set of HOTs prior to you finalising negotiations to ensure the needs of your business are adequately protected.