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Explanatory Notes
Commercial Lease of Business Premises (over 7 years)
Introduction This form of commercial lease is intended for use where a building, divided up into separate units, is to be let for commercial purposes – offices etc. It includes the clauses needed when a lease (of more than 7 years) has to be registered at HM Land Registry. Overall, this form is short as leases go but it contains the main provisions that appear in leases of this type. Though reasonably even-handed, it is generally landlord-friendly.
The key legal effect of a lease is the grant of a leasehold estate. This is called a demise – the right to possession of the Premises for the term of the lease. Beyond this, leases create a number of other legal effects, including obligations to pay rent, obligations to maintain and specified remedies. Landlord and Tenant law is a complex area and legal advice is always recommended – both for landlords and tenants before entering into a lease. Enquiries by the Landlord Before granting a lease, a landlord should make some checks on the prospective tenant – by obtaining references and by trying to satisfy himself as to the financial capacity of the proposed tenant. Although this lease does not contain any provision for a guarantee, it is not uncommon for a lease to a limited company, especially one which is owned and run by its shareholders, to require that one or more directors should personally guarantee the payment of the rent. Enquiries by the Tenant The Tenant will want to be certain about the following: 1. The condition of the Premises - the lease provides in clause 4.1.2 that the tenant has to carry out repairs. The tenant will not want to carry out repairs in respect of defects which existed before the Lease was completed otherwise these could amount to improvements for the landlord's benefit. The tenant should, therefore, survey the Premises and record in writing and perhaps with photographs what condition the Premise are in before completing the Lease. 2. Planning position - the tenant should ascertain that planning permission exists for the "Permitted Use" and it may also be advisable for the tenant to ascertain that Local Authority consents have been given for the construction of the Building. There may be conditions imposed by the Local Authority which will be binding on the tenant. 3. The landlord's legal title - the tenant should ensure that the landlord is the owner of the Building and is, therefore, in a position to grant the lease. The landlord's legal title may be registered at the Land Registry and, if so, a copy of the Register for the title should be obtained with a copy of the title plan. If the title is not registered, then the landlord may have to prove his legal ownership by producing copies of his deeds. In addition, if the landlord has charged or mortgaged the Building to secure a loan, then the consent of the lender will probably be required. There may be other questions relating to the landlord's title and it may be necessary to seek legal advice on this particular aspect. Tenant's statutory rights to a renewal In England and Wales, under the Landlord and Tenant Act 1954, a business tenant is entitled to have his lease renewed at the end of the term except in certain specified circumstances, in particular when the landlord wants to redevelop the site. It is, however, possible to exclude the provisions of the Act so that the tenant does not have any protection. Until recently this involved an application to the court but new regulations were enacted in 2003 which avoid the need for a court order. These are covered in our form of lease –see the more detailed comments under clause 14, below. Certificates and Reports The following may also be required: 1. An Energy Performance Certificate - the grant of most Leases of commercial premises will require this certificate to be obtained under the Regulations unless a valid Certificate is already in existence. There are financial penalties for the landlord if the Certificate is not obtained when it is required. The landlord should speak with one of the qualified providers for advice and there are a number of web pages offering guidance. 2. An Asbestos Survey Report - most commercial premises will require this Report to have been done. The landlord may already have a Report for the Building. If not and a Report is required, then the tenant should ask the landlord to obtain one from one of the qualified surveyors. Again, there are a number of web pages offering information. 3. A Fire Risk Assessment - the Tenant should ensure that the Building including the Premises has been assessed and ask to see a copy of the Report. Notes on the form of lease. If the Lease is for a term of more than 7 years, then it will have to be registered at the Land Registry. The Land Registry prescribed clauses should be included at the beginning of the lease. The Land Registry web page ( ) is very helpful and there are a number of leaflets on line as well. Details to be inserted on page 1 include: Date - this should be the date upon which the lease is signed by both parties. Parties - the full name and address of each party should be inserted here. Where the landlord or tenant is a limited company, the registered office address of the company should be shown and the company registration number.
Specific clauses:
1. Definitions. There are a number of details to be completed here: • The address of the building
• The commencement date of the lease
• The interest rate – i.e. the rate of interest payable by the tenant on any late payment of rent (or service charge). This may be a fixed percentage or one that is variable by reference to base rate – e.g. '3 per cent per annum above the Bank of England Base Rate'
• Details of the premises – e.g. "the premises comprising 100 square metres on the third floor of the building".
• The term i.e. duration of the lease with the commencement and expiry date.
• The rent: this will normally be an annual sum and we have two alternatives – either inclusive or exclusive of service charges. Note also the wording in square brackets relating to a "rent free period". Such provisions are occasionally agreed by parties e.g. where a landlord needs to let property in a "tenants' market" or where the tenant has agreed to carry out remedial work to the premises and insists upon a rent free period in return.
• Deposit: this may be required by the landlord on signature and clause 3.5 deals with the deposit in detail.
• Rent review dates, for example, there is a five year lease, it might be subject to review at the end of the second year and annually thereafter.
• Permitted use. The details need to be inserted here.
• Rights and Reservations – these are contained in the Schedule
• Service Charge and Services. The wording needs to be tailored to particular circumstances and, in the case of the Services, it may be better to list them in the Schedule – hence the alternative wording. 2. Grant of lease This sets out the basic agreement – namely that the landlord will grant the lease under the terms set out in this document. 3. Rent and other payment. It is usual for rent to be payable in advance in quarterly – i.e. three monthly – instalments and the details need to be inserted here. The first instalment may not be for a full three months and therefore this will need to be specified. Note the second alternate wording which will be suitable where a rent free period has been agreed. 3.2. applies where the service charge is payable in addition to the rent. 3.3. to 3.5 make it clear that late payment of rent will entitle the landlord to interest and they also deal with the method of payment and the fact that the tenant cannot make any deductions from payments which are due. 3.6 deals with the deposit where this is applicable. 4. Tenant's obligations. This clause sets out the basic rules to be adhered to by the tenant during the lease and includes such matters as keeping the premises clean, repairing any damage which is caused, complying with fire, health and safety regulations, and complying with the regulations governing the building which are imposed by the landlord etc. The use of the premises is restricted to the permitted use. 4.2 deals with the charges for which the tenant is going to be directly responsible. 5. Landlord's obligations. These include the obligation to keep the building insured and in good repair and to provide other services, where applicable. 6. Alterations. Any alterations to the premises which are let will normally require the landlord's consent and this is dealt with in clause 6. Clause 6.3 makes it clear that the premises must be reinstated into their original condition when the lease comes to an end. 7. Rent review This deals with the procedure for agreeing a new rent and the possible appointment of an expert if there is disagreement. The name of the organisation to appoint the expert needs to be inserted in 7.2. This could, in the UK, for example, be the Royal Institution of Chartered Surveyors. Where a rent free period is agreed this clause makes it clear that, for the purposes of the rent review, such rent free period is to be ignored.
8. Termination.
The landlord has the right to terminate the lease and recover the premises if the rent or service charge is not paid on time or if the tenant commits any other breach or goes bankrupt. Note the alternative wordings in square brackets at clause 8.1.2 relating to the extent of a breach that will entitle a landlord to terminate. The precise wording will sometimes be the subject of pre-lease negotiations between the prospective landlord and tenant. If such a situation occurs, recovery of possession my not be as straightforward as the wording of this clause suggests and legal advice will be required by the landlord. Indeed, any signs of a problem with a tenant should be monitored and lawyers consulted sooner rather than later. The landlord should not attempt to take over occupation of the Premises or to evict the tenant without taking legal advice first. 9. Suspension of rent. This would only apply if the property is damaged by an insured risk - in which the case the landlord's insurance ought to be arranged so as to cover him for loss of rent. 10. Expiry. When the lease comes an end, the premises must be handed over in the same condition as when the lease commenced (fair wear and tear excepted). Clause 10.2 provides a mechanism for resolving a dispute between landlord and tenant as to whether building/decoration works are required (or the nature/extent of any works required) at termination. A surveyor is to be appointed to determine whether works are required and if so the nature/extent of those works. It may be advisable for the landlord and tenant to agree a set of photographs of the premises as at commencement date so as to reduce the scope for dispute later and to assist a surveyor appointed to resolve any dispute. Note the suggested alternative wordings as to liability for meeting the surveyor's costs. 11. Assignment and sub-letting. There is a restriction on both assignment and sub-letting. In spite of this clause it is always possible for the landlord to give consent should this be requested. 12. Disputes and governing law. As drafted, this agreement is governed by English law and disputes are referred to the courts.
13. Notices.
This sets out the procedure for notices which have to be served in accordance with the terms of the lease. 14. Statutory matters. There are some technical points here which apply where the lease is granted in England. In particular, 14.1 is to be noted: Under the Landlord and Tenant Act 1954, a business tenant is entitled to have his lease renewed at the end of the term except in certain circumstances, in particular when the landlord wants to redevelop the site. It is, however, possible to exclude the provisions of the act so that the tenant does not have any protection. Until recently this involved an application to the court but new regulations were enacted in 2003 which avoid the need for a court order. Instead there are now three specific requirements if the tenant is not to obtain security of tenure at the end of the term: 1. The landlord must give a notice to the tenant in a prescribed form at least 14 days before the tenant enters into the tenancy or becomes contractually bound to do so. The form of notice which contains a 'health warning' is attached. 2. The tenant must sign a declaration in front of a solicitor or commissioner for oaths confirming that he has received the landlord's notice. The form of declaration is attached. 3. The lease must refer to the above procedures as having being complied with and confirm that the landlord and tenant agree to exclude the security of tenure provisions in Sections 24 to 28 of the Landlord & Tenant Act 1954. It is in fact possible for the notice to be served less than 14 days before the new tenancy but if Sections 24-28 are to be effectively excluded the notice must still be given and the tenant must sign a statutory declaration in front of a solicitor or commissioner for oaths before the tenant goes into possession or becomes contractually bound to take up the lease. The Government has issued a booklet on the new regulations which is available on the internet at www.odpm.gov.uk/stellent/groups/odpm_urbanpolicy/ documents/page/odpm_urbpol_028212.pdf Clause 14.1 should be omitted if the landlord does not want to take advantage of the right to exclude sections 24 to 28. 14.2 excludes the operation of the Contracts (Rights of Third Parties) Act, the effect of which might otherwise be to give certain third parties the benefit of provisions in the lease. Completion When all the details in the Lease have been completed along with the Schedules and plan,
then the Lease should be executed by the Landlord. An exact copy should also be
produced as the counterpart and this is executed by the Tenant. The Lease and
counterpart should be dated as soon as the parties are ready for the Lease to be granted.
The parties are then legally committed. The following may also be required 1. A Stamp Duty Land Tax Return. by the Tenant and payment of any Stamp Duty Land Tax.. The Tenant should refer to the web page of H M Revenue and Customs (www.hmrc.gov.uk/so/index.htm) to see what is required. The Return can be downloaded and then filed. There is a calculator to see if the Tax is payable. 2. Registration of the Lease at the Land Registry. The tenant should refer to the Land Registry web page for further guidance and the forms which have to be used. A fee to the Land Registry is also payable.
IMPORTANT NOTICE
You are being offered a lease without security of tenure. Do not commit yourself to a lease unless you have read this message carefully and have discussed it with a professional adviser. Business tenants normally have security of tenure - the right to stay in their business premises when the lease ends. If you commit yourself to the lease you will be giving up these important legal rights. • You will have no right to stay in the premises when the lease ends • Unless the landlord chooses to offer you another lease, you will need to leave the premises. • You will be unable to claim compensation for the loss of your business premises, unless the lease specifically gives you this right. • If the landlord offers you another lease, you will have no right to ask the court to fix the rent. It is therefore important to get professional advice - from a qualified surveyor, lawyer or accountant - before agreeing to give up these rights. If you want to ensure that you can stay in the same business premises when the lease ends, you should consult your adviser about another form of lease that does not exclude the protection of the Landlord and Tenant Act 1954. If you receive this notice at least 14 days before committing yourself to the lease, you will need to sign a simple declaration that you have received this notice and have accepted its consequences, before signing the lease. But if you do not receive at least 14 days notice, you will need to sign a "statutory" declaration. To do so, you will need to visit an independent solicitor (or someone else empowered to administer oaths). Unless there is a special reason for committing yourself to the lease sooner, you may want to ask the landlord to let you have at least 14 days to consider whether you wish to give up your statutory rights. If you then decide to go ahead with the agreement to exclude the protection of the Landlord and Tenant Act 1954, you will only need to make a simple declaration, and so you would not need to make a separate visit to an independent solicitor.
Form of Declaration to be made by Tenant
I
(name of declarant) of
(address) declare that
1.
(name of tenant) propose(s) to enter into a tenancy of premises at
(address of premises) for a term commencing on
2. I/The tenant propose(s) to enter into an agreement with
(name of landlord) that the provisions of sections 24 to 28 of the Landlord and Tenant Act 1954 (security of tenure) shall be excluded in relation to the tenancy. 3. The landlord has, not less than 14 days before I/the tenant enter(s) into the tenancy, or (if earlier) become(s) contractually bound to do so served on me/the tenant a notice in the form, or substantially in the form, set out in Schedule 1 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003. The form of notice set out in that Schedule is reproduced below. 4. I have/The tenant has read the notice referred to in paragraph 3 above and accept(s) the consequences of entering into the agreement referred to in paragraph 2 above. 5. (as appropriate) I am duly authorised by the tenant to make this declaration. DECLARED this
day of
To:
[Name and address of tenant] From:
Name and address of landlord]
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NOTES ON SIGNING AGREEMENTS & CONTRACTS
CONTRACT
All our contracts contain blank spaces. This note contains some hints on filling in those blank spaces but bear in mind that different countries have different rules, so if in doubt check with a local lawyer before finalising the contract. DATE Usually, the contract will be dated when it has been signed by all parties. Sometimes, however, work under an agreement will start before - or perhaps some time after - the date which appears in the agreement. This can be catered for in the language of the contract. For example, in our Agency Agreement (Doc A101) there is a defined "Commencement Date" which specifies the date upon which performance of the agreement commences. PARTIES Be sure to insert full and accurate details here. Where a party is a limited company, in addition to inserting the name (including the designation "Limited", "Ltd", "Inc" etc) you may wish to insert the place where the company is incorporated and the company registration number (where relevant). For example: "Ping Pong Limited, a company incorporated under the laws of England, Company No. 12345 and having its registered office at 1 Table Tennis Street, London EC1A 4BE, England." Where a party is an individual, insert the full names of the individual and his/her permanent address. Where a party is a partnership, you should insert the full names of the partners as well as the partnership name - e.g.: "John Reginald Smith and Jeremy Jones, carrying on business in partnership under the name of "Smith & Jones" of 1 Table Tennis Street, London EC1A 4BE, England.." Note: Sometimes the (official) address which appears on page 1 of the contract after the name of a party will be different from the address at which that party conducts its operations under the agreement. In that case, the "Notices" clause can reflect the address for routine communications. MAIN TEXT OF THE CONTRACT Where we have inserted wording in square brackets and/or in italics, this indicates that the wording is there by way of example - e.g. time periods or the name of an institution which will appoint an arbitrator. Be sure to remove the square brackets and insert the selected language before finalising the contract. Generally, of course, the entire text of the agreement will have to be carefully reviewed and amended to cater for your particular requirements. SIGNING THE CONTRACT Always ensure that whoever signs the contract has authority to do so. In the case of a company, the Articles of Incorporation may specify who can sign. Under English law, the signature of a director can usually be relied upon by the other party as a director will usually have ostensible authority with which to bind the company of which he/she is a director. In the case of an individual, clearly the individual should sign personally. In the case of a partnership, where there are many partners, the signature of all the partners may not be appropriate, in which case it is advisable to ensure that the partner(s) who do sign have authority to do so. Where a public body or government entity is a party to a contract, confirmation as to the authority of the person signing should be requested by the other party. If the document is a Deed, special requirements apply – see below. WITNESSES TO SIGNATURES The underlying purpose of having a signature witnessed by a third party is for evidential reasons. The witness would be available to confirm that the signature on the agreement is indeed the signature of the party whose name appears. In England, a contract can be effective without any signatures being witnessed. In some countries, in order to be legally enforceable, the contact may have to be signed before a notary public. As different jurisdictions have different rules, always check the rules before finalising the contract. NUMBER OF ORIGINAL CONTRACTS It is usual for each party to a contract to retain one original. Thus, where there are two parties, two original copies should be signed and one retained by each party. A contract can only be effective if the necessary formalities to create a binding agreement between the parties have been observed. If in doubt, obtain legal advice from lawyers in the appropriate jurisdiction. WHAT IS A DEED? Certain documents under English law are known as 'deeds.' A deed is a document that has to be signed and witnessed and the document itself should state that it is a deed. The differences between a deed and another form of contract include: (a) The limitation period – i.e. the period within which one party can sue for breach of contract – is twelve years whereas an ordinary contract has a six year limitation period. Deeds are therefore often used where there contract involves a long term risk. For example, a contract to build a house or block of flats will usually be executed as a deed so that the contractor can still have a liability for latent defects that appear in the twelve years following completion of the work. (b) There is no need for consideration: contract law principles normally require 'consideration', in the case of a sale, the consideration is the price payable by the buyer. Where there is no consideration, a deed should be used. EXECUTING (i.e. signing) A DEED. The key requirements are: 1. The document itself states that it is being signed – or 'executed' as a Deed. 2. An individual should sign in the presence of a witness who also signs. It is normal for a witness also to state their address and occupation – and to write their name if the signature is not easy to decipher. 3. A limited company should execute a deed by having it signed by two directors or a director and the company secretary. Alternatively, the company seal can be affixed in the presence of at least one director or officer of the company. Someone with an effective power of attorney can validly sign a deed on behalf of one of the parties to the deed.
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