In the final installment in a three-part series of articles on commercial leases, Katharine Jones, land law partner with Humphries Kirk in Dorchester concludes her consideration of the key terms that need to be included in a commercial lease.
Assignment and subletting
Business needs may change during the life of the lease and the tenant may want to pass on (assign) the lease to another tenant or sub-let all or part of the property. The identity of the current tenant is of huge importance to the landlord, who will want to be sure the rent and other costs will be paid. Landlords must be reasonable in dealing with requests for consent to assign or sublet but they are permitted to set out in the lease a range of conditions they may impose (for example, guarantees and rent deposits) and circumstances in which they may refuse consent (for example, if the proposed tenant falls short of agreed financial criteria). If the tenant wants to share the property with other companies in the same group, permission must be granted in the lease. If the landlord wants to keep complete control of who the tenant is, the lease may include a right of first refusal (or pre-emption) giving the landlord the chance to take the lease back if the tenant wants to assign. Such provisions must be carefully drafted to be effective.
Landlord’s costs and service charge
The landlord will aim to recover all the costs associated with the property from the tenant. The costs clause in the lease will set out what the tenant must pay and will typically include costs in relation to any requests for consent under the lease and costs incurred in enforcing the tenant’s obligations. The cost of maintaining the structure and other shared areas will usually be dealt with as a service charge. The lease will set out what expenses the landlord can recover and may list some which are excluded. There will be a process for the landlord to estimate the expected costs for each year. The tenant will pay a quarterly sum, based on that estimate, followed by a balancing payment or credit once the landlord knows how much it has actually spent.
If the tenant does not comply with the requirements of the lease, the landlord will have a number of ways to enforce them. The last resort is to bring the lease to an end, by forfeiture. Recent changes in the law mean that the landlord can only do this by a court procedure but there must also be a statement in the lease that the landlord may forfeit the lease if the tenant fails to remedy breaches that the landlord has brought to its attention.
What the landlord and tenant agree when negotiating the lease will affect their relationship, the use of the property and the landlord’s income throughout the lease. Disputes can be costly, so it pays to get good advice at the outset.