Understanding user clauses in a commercial lease

It has been well documented that the Work From Home edict caused a radical change in the way many people work and want to continue working, with the result that many offices are still quiet. Separately anecdotal evidence suggests that footfall on the high street is perhaps not what was the norm pre covid because of the increased reliance on online shopping.

What does this mean for user clauses in commercial leases?

From a Landlord’s point there are several purposes for entering into a commercial lease the most notably would be the provisions of reliable and continual rental income but another important consideration would be for the lease to ensure that the property is protected fully both physically and reputationally and that the cost of my repair for any damage, can reasonably, be recovered from the Tenant.

From a Tenant’s point of view the main consideration would be for the use of the property with the Landlord covenanting to give “quiet enjoyment”. However, post covid19 and the subsequent  challenging market and economic conditions that businesses now face, Tenants want protection should a prevention of occupation occur again but separately also an express right to vary and diversify the use of the property.

The use of a building or property is determined and governed by many factors, these include but are not limited to, legal title (and any restrictions or positive obligations for use contained therein), statutory requirements, lender’s requirements if the property is subject to a 3^rd party legal charge and the user clause contained in a commercial lease.

The use clause in a commercial lease will state how the Tenant may or may not use the property and in this regard the provisions will be prescriptive i.e. what must be done and / or restrictive i.e. what must not be done.

Finally, the use clause also affects and should be interpreted and understood in context with other clauses within a commercial lease some of which are considered further below in this article. The exact provisions of the clause will be negotiated and agreed between the parties and in the usual way will be agreed on the basis of prevalent market conditions, the parties intentions and also the bargaining strength of the parties.

Alienation – It is extremely obvious but still worth mentioning that, on the face of it, a broad user clause will make a commercial lease far more marketable for a Tenant seeking to assign or underlet their interest and conversely a commercial lease will be far less marketable if the use clause is extremely restrictive. The full express provisions of the alienation clause will need to be considered, even though the user clause may be broad, before an absolute conclusion that the lease is very marketable is reached. The alienation clause may also include further provisions and requirements that are so onerous that they in effect nullify the marketability of a commercial lease with a broad user clause.

Rent Review – The current market conditions and economic uncertainty appears to see the current commercial lettings market move towards shorter length leases with more frequent break provisions in favour of the tenant this as a result will potentially see less rent review clauses being incorporated into letting documents. However, and that being said, it is very likely that if a commercial lease did have rent review provisions with the rent to be adjusted in accordance with an open market review, then a broad use clause will inevitably produce a higher rent at review. Conversely a very narrow use clause or a use clause incorporating an absolute prohibition on the change of use will result in a lower rent at review. Any Tenant negotiating a use clause should therefore consider the effect this will have on a rent review if the rent review is to be calculated on the basis of the open market. One way to circumvent this concern would of course to be to agree and negotiate a rent review based on RPI on upon a Tenant’s business turnover. Hopefully, the message is clear that expert professional advice should certainly be sought in this respect.

Alterations – Does the alteration clause incorporated into the lease enable and allow the Tenant (and their successors in title) to alter the property to enable future uses that may be permitted in the use clause, although which may not be the current proposed use. For example, a clause that is broad and allows diverse use will be of little practical use if the lease also contains an absolute prohibition on alterations which may be required to make the property suitable for other specific allowed uses. It is impossible to predict what market and economic challenges a Tenant’s business my face in the future but it would be extremely prudent for any Tenant to ensure that the alterations clause allows the property to be altered not just so the current use can be enjoyed but also that in the future other permitted uses may also be enjoyed. Finally, in certain circumstances, the Tenant may be able to rely upon section 19 of the Landlord and Tenant Act 1927 to improve the Tenant’s position as the act may, where the Landlord’s consent is needed for improvements, imply that consent is not to be unreasonably withheld and further the act also grants statutory rights for the Tenant to carry out improvements even if there is a prohibition in this regard in the lease.

The latest version of the code was released in September 2020. The code proposes best practice for RICS agents, members, regulated firms and other property professionals and in relation to a user clause in a commercial lease, it simply directs that a Landlord’s control of use should be no more restrictive than is necessary to protect the property (or any adjoining) property owned by the Landlord.

In very simple terms a wide and broad user clause will bring flexibility for Tenants as to how they (or their successors in title) occupy the property and operate their businesses however it should also be seen that a wide use clause can very easily be frustrated by a restrictive alienation clause and it can (and in all likelihood will) result in a higher rent at review if the rent review provisions are an open market review.

The use clause and indeed all commercial lease clauses do need very careful negotiation, drafting and reflection by professional property advisers and whether you are a Landlord, Tenant or lender Hanne & co would be delighted to assist you in this respect.