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Tenant Amendments in Commercial Leases (The Devil is in the Detail) – Reynolds Report

Welcome to the murky and often misunderstood world of Commercial Property Law.

At some time in a lease transaction, usually just after the Heads of Terms have been agreed, the Tenant (or the Tenant’s solicitor) will receive from the Landlord’s solicitor a lengthy document (the draft Lease) – usually somewhere between 40 and 80 pages long. Sometimes this is based on an acceptable ‘neutral’ precedent. More frequently however it will be the Landlord’s ‘standard’ Lease – heavily stacked in the Landlord’s favour on almost every issue.

In this article I will look at some of the clauses on which it may be worthwhile for the Tenant (or the Tenant’s representatives) to push back – as what seem like small changes to the Landlord’s ‘standard’ wording can produce a fairer outcome for the Tenant.

VAT Clause

A Commercial Lease will usually state that if VAT is payable on sums due under the Lease (because the Landlord has exercised the ‘option to tax’ in relation to the property) then VAT will be payable in addition to the sums stated in the Lease.  This may be of particular concern to Tenants who make exempt supplies (i.e. supplies on which VAT is not charged).

In any event, if the Tenant is VAT registered the Tenant should seek to ensure that any obligation to pay any sum to the Tenant by way of refund or indemnity under the Lease also includes VAT paid on that sum. This will not arise automatically from the Tenant’s obligation to add VAT to sums paid to the Landlord.

Repair Clause/ Insurance

Frequently, where the premises to be let is part of a larger building (‘the Building’), the Lease will provide that it is the Landlord who will insure the structure of the premises.  This can lead to problems where damage to the premises has been caused by a risk which is not insured.

Frequently in standard Leases, the issue of ‘Uninsured Risk’ is dealt with by saying that the Tenant has no liability to repair when the premises is rendered unusable, or inaccessible, by an Uninsured Risk.  However ‘Uninsured Risk’ is a defined term, being a risk which would have been insured under the terms of the Lease (one which is included in the list of Insured Risks) but which is not in fact covered due to exclusions or limitations imposed by insurers and/or the unavailability of insurance on acceptable terms.  What is to happen if there is damage to the premises due to a risk not included in the list of Insured Risks, is rarely addressed.

Use Clause

A Commercial Lease will usually contain a clause restricting use of the premises to a specific type of business (e.g. hairdresser) and/or to one or more use classes in the Town and Country Planning (Use Classes) Order.

On initial consideration it may seem that it is in the Tenant’s interest for the Use Clause to be worded as widely as possible.  Beware however that this may have an impact at rent review – with a more broadly worded clause meaning that a higher rent may be argued for.

In practice there is very little point (from the Tenant’s point of view) in having a Use Clause which allows alternative uses of the premises for which other necessary consents (in particular planning permission) are not likely to be obtained.

Compliance with Laws Clause

A Compliance with Laws Clause requires the Tenant to comply with all laws relating to the premises, their occupation and use.  This can include capital expenditure or improvements required by statute and/or outstanding conditions attached to planning permissions obtained by the Landlord.

The Tenant’s representatives should use best efforts to restrict such exposure.

Rent Review

Landlord’s rent review clauses will frequently be drafted with reference to ‘headline’ rents.  These are market rents which ignore the effect of concessions such as rent-free periods.

Clauses drafted in this manner will result in inflated rents on review and are best avoided.

Break Clause

Those of you who have read previous editions of the Reynolds Report will be familiar with the complexity for Tenants of validly exercising a Break Clause (See: “So you want to surrender?  Not so fast, mon ami.”)

Many of these difficulties are ‘set up’ at the time when the Lease is drafted – with the Tenant’s representatives failing to get items which will be difficult to comply with, removed.

Service Charge

It is essential to remember that – unlike the situation in relation to residential service charges – there is currently no statutory regulation of service charges in Commercial Leases.  The closest thing to any kind of regulation is the RICS 2018 Professional Statement, Service Charges in Commercial Property (currently in its 1st edition) (‘the Statement’).

Frequently however Landlords will object to any reference to the Statement in the Lease – saying that they do not wish to be tied to using RICS members (surveyors) to carry out and manage their Service Charge functions.

All of this leaves a number of issues open for determination:

  1. On the assumption that the Building is made up of a number of areas let or capable of being let to Tenants (‘Lettable Units’), how is the apportionment of the overall cost of services between Lettable Units to be determined?
  2. What is to happen in relation to the share due from Lettable Units which are not in fact let? Is this to be borne by the Landlord or shared out between Tenants actually in occupation? and
  3. How is the effect of agreements reached with individual Tenants (for example a cap on Service Charge) to be dealt with when determining the amount payable by other Tenants? Does the Landlord have to ‘absorb’ this or is the remaining amount to be shared out between other Tenants?

These are all areas to be looked at carefully in drafting.

In conclusion: following on from Covid, lockdown and associated events, the ‘working from home’ revolution has been enthusiastically grasped by many professional service businesses.  No doubt some of the motivation behind this has been to accommodate the wishes of staff and keep them happy.

There must also be a suspicion however that some of the enthusiasm for this trend, at least on the part of business owners – allowing their most valuable asset (people) to work from home, frequently with limited hardware (a laptop and no printer or scanners) and sometimes on their kitchen table with children bouncing toys off their heads – may also have to do with a wish to have as little as possible to do with commercial landlords (and their solicitors) following bad experiences in the past.

Hopefully the large amount of office space now standing empty will produce a sea-change in Landlords’ approach. Until this happens however (and any change is likely to be slow) you would be well advised to read any Commercial Lease very carefully before signing or – better still – get a Commercial Property specialist to look at it.

The Property & Commercial Department at Barrett & Co would be very happy to help.

Further Reading:

The continuing impacts of COVID19 on the property market- Part 2

Do I really need a Solicitor for a Commercial Lease?

Selling a Property as a Trustee

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Our Property and Commercial Department is headed by Martin Reynolds an experienced commercial solicitor with a background in commercial dispute resolution and insolvency law. To contact Martin and his team; call 0118 958 9711 or email [email protected].

"barrettandco" and "Barrett & Co" are trading names of Barrett & Co Solicitors LLP, a Limited Liability Partnership incorporated in England and Wales under registration number OC356263, with registered office at Advantage House, 87 Castle Street, Reading, Berkshire, RG1 7SN. Barrett & Co Solicitors LLP is authorised and regulated by the Solicitors Regulation Authority (SRA Number 549694).

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