19 January 2022
Flexibility for Commercial Tenants
In these uncertain times, Hedley Tipton, B P Collins’ property solicitor advises that commercial tenants need to adapt quickly to the changing conditions to remain productive and successful. Tenants need flexibility to adapt and this should be reflected in the terms of a lease. Here he provides key options for consideration.
Take a shorter lease
Even pre-pandemic, there was a trend towards shorter lease terms, particularly in the office and retail sectors. A short term will reduce exposure for a tenant.
Break rights give the opportunity to determine the lease prior to the contractual expiry date and can be fixed or rolling. It is crucial that any conditions attached to the break right are not too onerous so as to unreasonably prevent a successful exercise of the break. Case law has shown that break conditions are strictly interpreted and it is therefore important to seek professional advice on the drafting of such clauses. It is also worth noting that the exercise of a break to determine the lease early will not entitle the tenant to a refund of any Stamp Duty Land Tax paid on the grant of the lease.
Shorter lease with option to renew
An alternative to a long lease with an option to break, is a shorter lease with an option to renew. This will allow a tenant to call for the grant of a new lease at the end of the initial lease. Unlike exercising a right of renewal under the Landlord and Tenant Act 1954, the option to renew cannot be opposed by the landlord provided the requisite conditions are met and the landlord will become obliged to grant the new lease. The option to renew will be ignored for Stamp Duty Land Tax purposes on the grant of the initial lease so this can mitigate tax liability.
Consider different types of rental arrangements
Turnover rents are more regularly being used in retail leases and provides for a base rent to be payable which is then topped up by a percentage of turnover made over a certain level. Inclusive rents, which will usually include insurances, utilities and any services, will provide certainty for the tenant and it will usually be the landlord who runs the risk of costs increasing during the term of the lease.
Tenants should ensure that they are able to deal with their leasehold interest. Assigning and subletting will enable a tenant to pass on occupation and the rental liability. This will undoubtedly be subject to the landlord’s consent and again care should be taken as to what conditions are attached to this consent.
Finally, a broad permitted use of the property will assist with dealing with the property as it opens up a wider market. On the flip side, caution should be taken to ensure this is not too broad where there are open market rent review provisions as this could inflate the rent artificially.