Owning leasehold interest in property is often desirable in a commercial context. Companies may want to have an interest in a property which is not required and to actually purchase the entire freehold. A company may want to, for example, lease the floor of a larger building. Accordingly commercial contracts need to be prepared that reflect the wishes of the parties. Commercial Leases can also be very complicated because they attempt to anticipate every event that might occur in the course of a term. Normally commercial Leases will be based on a precedent. Leases can come in many forms and in varying lengths depending on the type of the property. However, a typical business Lease of a whole property will often contain the following elements.
Prescribed clauses
These are standard sets of clauses at the beginning of the Lease or immediately after any front cover sheet and/or contents page. Prescribed clauses are essentially a summary of the important details of the Lease and bring together all the information that the Land Registry needs in order to complete registration.
Commencement
The Lease will start with the words ‘this Lease’ followed by the date of its grant and the names and addresses of the parties.
Interpretation clauses
These show how particular terms are to be defined and avoid having to repeat the same phrase over and over again later in the document.
The grant of the Lease
This will show the operative part where the landlord grants the Lease to, what the extent of it is etc.
Ancillary rights
These given the tenant rights over other land to enable them to use the Lease property more effectively.
Rights expected and reserved
These are rights in favour of the landlord over the Lease property such as a right to enter to do repairs and to service media and other parts of the building.
Annual rent
This is the rent payable by the tenant which is the landlord’s income from the property.
Rent review
Unless the term is very short the landlord will want to ensure that there is a mechanism to increase the annual rent in line with rises in rental value in the wider property market.
Tenant’s covenants
There will be obligations imposed on the tenant as to how they use and look after the property. Similarly there will be landlord’s covenants with respect to how the landlord is expected to manage the building.
Landlord’s right to enter on breach or repair covenant
This will give the landlord the right to enter and inspect, give notice to the tenant to repair and if the tenant fails to do so within a certain period then the landlord could do the work themselves.
Re-entry and forfeiture
This will allow the landlord to bring the Lease to an end if the tenant fails to pay the annual rent.
Most commercial properties are leased to the tenant for a fixed term. This fixed period can be weeks, months or years but is most likely to be years giving the tenant time to establish the business. By contrast a period tenancy is one which is not fixed for a fixed period but continues indefinitely from one period to another. This could be an option for tenants who are not sure how long they want to remain in a particular building. The third option is a tenancy at will. This is where a tenant occupies the property with permission of the landlord on the terms that the tenancy may be terminated by either party at any time.
There are different types of leasehold covenant. Tenants are free to do as they wish with their property unless there is any covenant preventing it. This is why landlords can insist upon provisions in the Lease which either prohibits certain actions by the tenant or only allow the tenant to do certain things with permission. This ensure that the landlord knows what is happening at the building – for example, who is occupying and what alterations have been carried out. These covenants fall into three categories:
- Absolute covenant – meaning the tenant absolutely cannot carry out the stated action according to the Lease.
- A qualified covenant – this type of covenant allows the tenant to carry out the stated action but only if it obtains landlord’s consent first.
- A fully qualified covenant – this covenant allows the tenant to carry out the stated action if it obtains the landlord’s consent first but goes on to say that the landlord will not be able to withhold consent unreasonably.
For a landlord a leasehold property is an investment product. This means it’s important that the Lease allows the property to perform as an investment. Historically Leases in England and Wales are FRI or full reporting and insuring Leases meaning that the landlord gets a clear rental stream of all profit and does not have to dip in to pay for repairs, maintenance and insurance contributions. It’s important therefore that the Lease acts to preserve the capital value of the property by ensuring that the building is kept in good repair, the Lease reserves its market rent throughout the term to ensure a steady income and thirdly that the investment is readily sellable if necessary i.e. the Lease must be acceptable to future buyers of the freehold. FRI Leases protect landlord from incurring any expenditure that cannot be recovered from tenants. Where one tenant has the Lease of a building then it’s usual to place that tenant under a full repairing obligation for the whole building. Where a tenant has a Lease or part of the landlord’s building responsibility will usually be divided between the landlord and the tenant.
Many arguments have arisen over the precise meaning of the covenant to repair. Case law has established a number of principles:
- There must be disrepair first before the tenant can be in breach of a covenant to repair. The physical condition of the property must have deteriorated from some previous physical condition (see Post Officer –v- Aquarius Properties Limited 1987).
- This is a problem if the building is brand new and will inevitably deteriorate from its original pristine condition. However the property need not be kept in perfect repair it need only be put in such a state of repair as renders it fit for the occupation of a reasonably minded tenant of the class likely to take is (see Prowfut –v- Hart 1890).
- Works of renewal or improvement go beyond repair. Repair is restoration by renewal or replacement of some parts of the whole not renewal or replacement of the whole (Lurcum –v- Wakeley 1911).
- A repairing covenant does not oblige the tenant to give back to the landlord a property that is wholly different from that leased to them, but it can oblige the tenant to remedy inherent defect in the design and/or construction of the building if that is the only way to effect the repair (see Ravenscroft Properties Limited –v- Daston Holdings Limited 1980).
It’s clearly important to ensure that adequate provisions are in place to insure the property against damage by fire, flood etc. In the case of letting the whole the tenant might be made responsible for the insurance. There is often an inclusive list of the risks which the landlord must insure against for example fire, storm, flood etc. The problem with this is that the landlord may continue to insure against unlikely or expensive risks and if new risks arise these may not be covered. It is common therefore for the list of risks to conclude with such other risks as the landlord may reasonably require. The landlord’s obligation to insure should be limited so that it does not include exclusions, limitations etc and conditions imposed by the insurer.