Commercial Property

Commercial property refers to buildings or land used for business purposes. This includes offices, retail units and industrial warehouses, as well as undeveloped land that is intended for commercial use. Commercial property is typically leased to tenants who run their businesses from the premises, and planning permission must be in place for the specific commercial use, which the property is put to.

The solicitor will perform title due diligence (which involves raising enquiries and obtaining searches), report to clients on arising matters, review security documentation supplied by a lender, and negotiate the transactional documents. This may include leases, contracts (e.g. a sale/purchase contract, or a licence for alterations), transfer deeds, and land registry applications. Once the documents are in the agreed form and have been signed by all parties, their solicitors will exchange contracts (where applicable) and complete the transaction. Following completion, Stamp Duty Land Tax may need to be paid within 14 days, legal charges registered with Companies House within 21 days, and the transaction registered with HM Land Registry.

A leasehold property is a type of property under which the immediate ‘ownership’ interest in that land derives from a lease, in the form of an exclusive right to occupy and use the property for a specified time. This is distinct from a freehold property, which is owned outright. The land upon which a leasehold property lies continues to be owned by the freeholder (or landlord), after the lease has been granted. Therefore, when the lease comes to an end, the tenant loses their right to occupy the land, and ownership reverts to the freeholder unless a new lease is negotiated. Leaseholders are typically required to pay an annual payment to the landlord under the lease called a ‘ground rent’, in consideration of occupying the landlord’s land. The leaseholder may also be required to pay service charges to the landlord, for maintenance of common areas and other parts of the development.

This depends on the location of the site and nature of the property. However, the standard searches to consider are the local authority search, drainage and water search, environmental search, and chancel search. Further searches may also be necessary, depending on the matters raised in the standard searches, including a flood search, highways search, and energy and infrastructure risk. In the case of undeveloped land, a utilities search would be appropriate.

An agreement for lease is a contract that binds a landlord, tenant, and tenant’s guarantor, to enter a lease on agreed terms, at a point in the future. It stipulates the conditions that will need to be met before the grant of the lease, such as the landlord undertaking certain works at the property, and the tenant completing fit-out works in accordance with a licence for alterations, and all the necessary planning approvals.

This is a document containing the key terms that have been negotiated between the landlord and tenant for a new commercial tenancy. This includes the extent of the premises, length of the lease term, annual rent, rent review, break rights, service charges, insurance, and repair and alteration obligations. It will also include special conditions, including any contributions the tenant will make to the landlord’s costs. Whilst it is a written record of what has been agreed, it is not a legally binding document, and the terms (which will form the lease) can be varied at any time before the lease is entered.

An FRI lease is a full repairing and insuring lease. This is a form of commercial lease which is generally acceptable to institutions, including insurance companies and pension funds. Under an FRI lease, the tenant bears the full costs of repairs and insurance, albeit the landlord will arrange the insurance policy (and recover insurance costs through an ‘insurance rent’), and, in a multi-let building, carry out the repairs to common parts (and recover the cost of those repairs, through a service charge). The FRI lease is institutionally acceptable because it allows the landlord to receive a clear income stream, as they take ‘home’ the entire rent (i.e. the rental income) without cost to itself.

This depends on the wording in the lease, which may (a) permit the tenant to make some alterations even without the landlord’s consent (b) permit the tenant to make certain alterations but only with the landlord’s consent, and (c) completely prohibit some alterations. For example, a FRI lease will typically allow a tenant to install demountable partitioning inside the property without the landlord’s consent, but require the consent of the landlord, for any other internal, non-structural alteration. Additionally, the FRI lease will usually prohibit a tenant from carrying out structural alterations to the property.

A service charge is payment to the landlord for the provision of insurance, maintenance, repair, management and any other services at the commercial premises, the building in which the premises lie, or communal areas.

Unlike residential service charges, there are no statutory obligations on the landlord to be reasonable when operating a service charge in respect of commercial premises. If the lease is for the whole (as opposed to part) of a property or building, it is unlikely that the lease will include a requirement for a Tenant to pay a service charge. Instead, the Tenant will typically covenant to put and keep the whole property in a good state of repair and condition, although this may be limited to the state of repair and condition at the outset, usually evidenced by a photographic schedule of condition annexed to the lease. The lease will outline the basis upon which the service charge apportionment is calculated, usually as a percentage (based on square footage), or on a ‘fair and reasonable’ basis.

When a lease is for a term of 5 years or more it is extremely likely that the lease will contain provisions to review (i.e. in practice, increase) the underlying rental figure. The purpose of this is to protect and maintain the value of the landlord’s reversionary interest against inflation, whilst ensuring that the Tenant pays the fair and market rent at that time.

The four most common types of review in practice are:

• Open Market upwards only (probably the most common form of review in practice)
• Open Market Upwards or downwards
• Fixed increase
• Index Linked

Legal advice should be sought during the negotiation of these clauses prior to completion of the lease as they have different implications for the landlord and tenant. The advice of a professional valuer should also be sought during the practical stages of a rent review.

A lease is a commercial contract creating an interest in a building, property, or in land, as well as imposing obligations and liabilities upon the parties. By definition, a lease will be for a fixed term (a specified time), and the lease will terminate at the end of its contractual term. When the lease comes to an end in the natural way, i.e., at the end of the term, this is known as ‘determination by ‘effluxion of time’, subject to any agreement (or statutory right under the Landlord and Tenant Act 1954) to renew or extend the lease term. Should a tenant wish to terminate the lease before the term has expired, they would need to do so by agreement with the landlord (which may be at the price of a premium and other conditions), by exercising a break right (in accordance with a tenant’s break clause in the lease), or by assigning (transferring) or subletting their interest in the property, to a new tenant.

You can find out further information about terminating a commercial lease in our recent article.

The use of a building or property is governed by many factors, including legal title (i.e. any restrictions or positive obligations for use contained in the title register), statutory requirements (and existing planning permissions), the lender’s requirements (if the property is subject to a Third-Party Legal Charge) and the User Clause (or the ‘Permitted Use’ clause) in a commercial lease. The User Clause in a commercial lease will expressly state how the Tenant may or may not use the property. The provisions may be prescriptive, specifying exactly how the property must be used, and/or restrictive, imposing prohibitions on what the tenant must not do from the premises.  Such clause may be narrow, for example, requiring the Tenant to use the Property solely as a ‘travel agents’ or extensive, imposing a covenant (contractual obligation) on the tenant to use the Property for any use pursuant to a particular Use Class of the Town and Country (use Classes) Order 1987.  Further information regarding User Clauses  may be found here.

The Tenant will be responsible for these matters, with the extent, and nature of these liabilities, expressly stated in the commercial lease. If the lease is for part only of the building, the landlord will likely covenant to repair the structure and common parts of the building or property and recover such costs from the Tenants through the service charge. If the lease is of a whole property, the Tenant will be required to put and keep the property in a good state of repair and condition (but this could be limited to the state of repair and condition at the commencement of the lease, usually evidenced by a photographic schedule of condition).

Once the tenant’s offer has been accepted by the landlord, the terms for the new lease will be negotiated between the parties, usually through a commercial estate or letting agent. Once agreed, formal Heads of Terms (‘HOTs’) will be circulated the parties’ solicitors.  Landlord and tenant may wish to instruct their respective solicitors during the initial negotiation stage, to ensure they are fully aware of the obligations and potential liabilities created by the HOTs. That said, the HOTs will be ‘subject to lease’ – they are not binding until the lease has been finalised, although any attempt to vary the terms at a later stage, may risk damaging the working relationship between the parties. The landlord is responsible for drafting the lease based on the HOTs, as well any other transactional documents. This may include an Agreement for Lease (or contract to enter the lease subject to Fit-Out works), Licences for Alterations, and Rent Deposit Deed. Consideration should be given to a proposed fit-out of the premises upon completion, as well as general business considerations, from tax matters and planning permissions to strategy and the practicalities of operating a functioning business from the premises.

Costs will be incurred prior to the completion of the lease, on and following completion of the lease, and finally, following termination of the lease.

• Prior to completing the lease, a well-advised tenant will typically incur the costs of a buildings survey, tax advice, professional legal advice (including search fees, HM Land Registry application fees and Stamp Duty Land Tax liability), other professional (e.g. an architect’s) fees, as well as the costs of fit-out works, although this is a non-exhaustive list. The landlord may also incur the costs of a surveyor, in addition to their own legal fees which the tenant may or may not contribute to.
• On and following the lease being entered (‘completion’ of the transaction), the tenant will be liable to pay the starting rent (including any rent deposit), service charge contributions, insurance contribution, and rates and taxes at the property. The tenant may also be required to pay the landlord’s costs pursuant to any licence (consent) for the tenant’s assignment, underletting, or alterations to the property.
• Upon termination of the lease, a tenant can expect to incur costs arising from repairs to the property (to reinstate the premises to the condition required by the lease), and the removal of the tenants’ fixtures, fittings, and business apparatus.The tenant may also be charged a fee by the landlord relating to the exercise of a break right. They may also be tax implications from VAT to Capital Gains Tax, which the tenant should seek tax advice for.