NOT TAKING ADVICE ON NEW LEASES CAN BE AN EXPENSIVE MISTAKE

Basic mistakes made when negotiating commercial leases can lead to complicated disputes and big costs further down the line, says Nick Williams.

Negotiating commercial leases can present all sorts of traps for the unwary.  These can be complex legal agreements, and sufficient thought needs to be given to the potential consequences of clauses contained within those leases – consequences which may not become apparent until further down the line.

Commercial leases can be much more onerous than some other forms of tenancies, such as residential Assured Shorthold Tenancy agreements, and there are many issues which need careful consideration.  As with all business transactions, negotiating commercial lease terms is an area for the professional.

The statutory framework under which commercial leases are negotiated is the Landlord and Tenant Act 1954 Pt.II (often abbreviated to The 54 Act). 

Introduced after the war to protect business tenants in an era when commercial property was still in short supply after wartime bombing, its aim was – and still is – to ensure that commercial tenants who had worked hard to build up a business did not see that business threatened by having nowhere to operate at the end of a lease. 

In essence, The 54 Act gives commercial tenants security of tenure and the right to renew a lease – but only if the original lease has been properly negotiated.  If that security of tenure has been excluded, or in certain clearly defined circumstances, then the landlord is under no obligation to agree a new lease upon renewal.

However, despite this admirable piece of legislation protecting business tenants, you might be surprised just how often those tenants make mistakes at the point of signing a lease which come back to bite them – all for the want to some proper professional advice.

These mistakes include:

• signing up for full repairing and insuring leases without fully understanding the length and extent of responsibility for repairs and maintenance of the building
• not checking the conditions attached to break clauses, such as ‘time of the essence’ notice periods and the obligations to have conformed with every detail of the covenants (often meaning tenants find themselves unable to exercise those break clauses)
• agreeing to rent reviews without fully understanding what those reviews will be based on – a potentially expensive mistake at a time when industrial rents, in particular, are rising fast

Some tenants shy away from taking advice from a solicitor and a surveyor prior to signing a lease, but the potential costs of not doing so are very high.  Ensuring that the lease itself is crystal clear, avoiding onerous legal clauses, negotiating the right rent, repairing obligations, rent review provision and break clauses: these are all jobs for the professional.