I WANT TO TAKE A COMMERCIAL LEASE
Taking a Lease of a commercial premises for the first time can be an unfamiliar and daunting process. Most Leases will run for a substantial amount of time and include a numerous clauses restricting things such as the permitted use of the premises, alterations to the property and signage. There may also be pitfalls you won’t be aware of and obligations placed upon you which you may not fully understand.
Waldrons can assist you with taking a Lease and advise you in relation to the terms and obligations contained within it in addition to dealing with Land Registry registration and SDLT return if required.
I WANT TO LEASE MY COMMERCIAL PROPERTY
If you have a commercial property that you do not use at the moment or own commercial property as an investment then granting a Lease of the property is a good way of generating income from a tenant who will be paying rent.
In simple terms, a commercial Lease is an agreement between one party and another whereby the landowner grants exclusive possession of the land/property for a determinable period of time in exchange for payment of rent.
It is important to have a formal Lease in place so that the tenant does not obtain rights in the property and so that you can easily remove the tenant if they do not pay the rent or breach any obligations in the agreement.
I WANT TO MAKE ALTERATIONS TO MY LEASED PROPERTY
As a tenant you may wish to at some point of your Lease make changes to the Property. These may be anything from tenant’s fit out at the start of the Lease, to very minor changes during the term, to substantial alterations and renovation works.
The very first thing to do should you wish to make any alterations to your property is to check the Lease. Most Leases will include clauses that deal with alterations and how to raise a request to the Landlord for permission to carry out any alterations. In most cases, alterations will only be allowed with the consent from the Landlord upon receipt of a written request. This clause may or may not include the provision that the Landlord may not unreasonably withhold their consent.
Waldrons can assist by advising in respect of the clauses surrounding alterations in your Lease and also assist in the drafting of Licence for Alterations which may be entered into prior to entering into the Lease.
CAN I SELL MY COMMERCIAL LEASE?
It may be possible to sell your Commercial Lease but it is important to first of all consider your Lease as you may require your Landlords consent to do so. A Landlord is duty bound to consider a request for consent to the Transfer of the Lease.
Transferring/selling a Lease is often known as assignment of the Lease. Alternatively, you may be looking to sub-let whole or part of your Leased premises to another.
It is important that you obtain your Landlords consent and any subsequent assignment/sub-let is done correctly as if not, you may find yourself in years to come still having continuing liabilities under the Lease.
Waldrons can assist you in requesting consent from the Landlord and dealing with the assignment and sub-letting of the Lease.
HOW CAN I RENEW MY LEASE?
The Landlord and Tenant Act 1954 gives business tenants security of tenure which is the right to renew the tenancy when it comes to an end. If the landlord and tenant agree that there should be a new tenancy, but cannot agree on its terms, either can apply to the court for a new tenancy. Or if the tenant wants a new tenancy, but the landlord refuses to grant one, the tenant can apply to the court. The court will then settle the rent and the other terms of the new tenancy.
If the landlord and tenant are able to agree to the terms of the new Lease and these are broadly the same as the original Lease, renewal can be dealt with by a Lease Renewal by Reference document.
Waldrons can assist you with your Lease renewal and also check your Lease to see if you are entitled under the Landlord and Tenant Act 1954 to renew or whether you ‘contracted out’ upon taking the Lease.
HOW DO I END MY LEASE?
Normally a Lease will run to the end of the term but can be ended earlier in certain circumstances:
(1) Break clauses – it can be agreed at the outset of the matter when negotiating heads of terms that there will be break clause in the Lease. A Break Clause can either be tenant only or in respect of both parties and can enable you to end the Lease early at certain points during the term upon giving sufficient notice.
(2) Forfeiture clauses – this is a Clause normally included in a Lease which gives the Landlord the right to end the Lease if the Tenant is in breach of the term of the Lease i.e. has failed to pay rent.
(3) Surrender of the Lease – A Lease is can be surrendered if both the landlord and tenant agree that the Lease is to be extinguished and the Tenants interest transferred back to the Landlord. This can be done formally by deed but this is not always necessary. It can be done by conduct if the Landlord and Tenant agree that the Lease will be surrendered and they act in a way that is inconsistent with the Lease continuing, the Lease can be surrendered by operation of law. It may seem that surrendering the Lease without a formal Deed is quicker and cheaper but it can create uncertainty about what were the intentions of the parties.
If your Lease affords you the automatic right to renew under the Landlord and Tenant Act 1954, in order to terminate the Lease you will be required to serve one of the following statutory notices dependent on if you are the Landlord or the Tenant:
(1) Section 25 notice - if you are a Landlord who wants to terminate the Lease. If you can satisfy one of the grounds in Section 30 of the Act, the Tenant will not be able to take a new Lease. These include breach of repairing obligations and a persistent delay in paying rent
(2) Section 26 notice - if you are a tenant wants to terminate the tenancy and request a new one.
HOW DO I PROTECT MY RENT DEPOSIT?
Your Landlord may have requested a rent deposit from you upon taking out a Commercial Lease which could be a sum anywhere in the region of 3-6 months worth of rent. In order to ensure this is protected, you could ask your Landlord for a rent deposit deed.
A rent deposit deed is a document which sets how a landlord secures a commercial tenant's deposit. This deed sets up as a charging arrangement on the deposit money in the landlord's favour. This means the deposit remains the property of the tenant, but if the tenant defaults on the lease, (e.g. does not pay the rent) the landlord can take money out of the deposit. It also protects the landlord for losses and expenses, or non-performance of covenants.
WHAT REPAIRS WILL I BE RESPONSIBLE FOR UNDER MY LEASE?
Tenants
You will need to look at your Lease to find out exactly what repair obligations were placed upon you when entering into the Lease. Generally, commercial tenants are required to maintain the Leased property end ensure that it is restored to the condition it was in at the beginning of the Lease.
Most Commercial Leases are on a full repairing and insuring basis (FRI) which means that all costs of maintenance, repair and insurance are born by the tenant.
Landlords
You will need to consider your Lease to find out exactly what repair obligations you are under. Generally, Landlords are responsible for any structural repairs needed to maintain commercial properties. This includes exterior walls, foundations, flooring structure and the roof.
Non-structural maintenance issues, such as plumbing and air conditioning normally have to be maintained by the Tenant - unless there is a management/maintenance fee paid to the Landlord which covers such repairs. Repairs to any communal areas in a leased property will usually be the responsibility of the Landlord (or management company/agent if one is appointed by the landlord).
ARE THERE ANY HIDDEN COSTS WHEN ENTERING INTO A COMMERCIAL LEASE?
There may be additional costs that you have not considered when looking to take a Commercial Lease. It is important to ascertain whether or not VAT is payable on the rent payments, how much you are going to be spending on utilities such as gas and electric and what are the applicable business rates for the property.
In addition, check if you are going to be required to pay a service charge under the Lease and if so, how much this is likely to be. If you are entering into a full repair and insuring Lease, you will be responsible for the cost of repairs to the property as well as the Landlords insurance premium.
IS STAMP DUTY LAND TAX PAYABLE ON LEASES?
Stamp Duty Land Tax (SDLT) is sometimes payable on Leases as well as property purchases. This is dependant on the Net Present Value (NPV) of the Lease and only usually applies for medium to long term leases with relatively high rents.
In some instances, even if the NPV amount does not trigger payment of SDLT, HMRC may still require notification of the Lease. This will be the case if the Lease is registerable at the Land Registry and therefore for a term of more than 7 years.
What is Stamp Duty Land Tax (SDLT)?
Stamp duty land tax (SDLT) is a tax on land transactions. These land transactions include acquisitions of freehold or leasehold interests in land located in the UK, for a value.
SDLT is calculated on a percentage of the amount paid for the property on a progressive slice system. This means that the rates are charged on the portion of the amount paid that falls within each rate band. In the case of leases, this includes any premium (usually a lump sum payment on the grant of a lease) and any rent.
For example:
If you are purchasing a property for £500,000 SDLT would be payable as follows:
| Purchase Price Bands (£) | Percentage Rate (%) | SDLT Due (£) |
|---|---|---|
| Up to 150,000 | 0 | 0 |
| Above 150,000 and up to 250,000 | 2 | 2,000 |
| Above 250,000 | 5 | 12,500 |
| Total SDLT Due | 14,500 |
Certain land transactions are exempt from SDLT or eligible for relief from SDLT. We will liaise with your accountants if they consider a transaction may be exempt or eligible for relief.
You are obliged to notify HMRC of land transactions and pay any SDLT which may be due within 30 days of completing the transaction in order to avoid incurring penalties and interest. We will help to prepare the necessary SDLT return and can submit the return and payment to HMRC on your behalf.
Whilst we cannot provide tax advice we can provide details of specialist tax advisers who can assist you with this if you require.
