Pastures New? – Key Points to Consider for Commercial Lease Terms

Links to our previous articles by Real Estate partners Emily Carey and Nicola Wood can be found here:

What Kind of Lease Do I Have and Why Does It Matter?

The Departure Lounge – Planning a Lease Exit

Breaking and Leaving – Exercising a Break Clause

Early Advice

Professional advice in the early stages can save both parties time and money. Leases are involved commercial contracts, with additional layers of property law and landlord and tenant regulation thrown in for good measure. Whilst comprehensive template heads of terms are freely available online (RICS Code for leasing business premises)both parties should instruct a commercial agent or surveyor to help tailor their agreements.

Agreeing the Initial Rent

Agreeing a fair initial rent will need valuation advice, usually informed by the value of recent, similar transactions.

Remember, if the landlord has made an option to tax the premises to recover its own VAT, it will charge this on the rent to the tenant, and spell out in the lease that the rent is ‘exclusive of VAT.’

Unless an inclusive annual rent or service charge is agreed, a commercial tenant will usually be responsible for paying its own business rates and utilities costs, in addition to the lease rents and any VAT.

Reviewing the Initial Rent

Depending on the length of term, a lease can provide for increases (almost never decreases) in its yearly rent. Leases are typically held for periods of 3 or 5 years. Whilst rent review provisions need careful drafting, we outline four common methods below:

• An open market review, where the parties’ surveyors assess how much similar premises would let for at the review date, guided by a set of parameters outlined in the lease. They then agree on whether an uplift is appropriate.
• An alternative approach is to provide for annual increases on an agreed date, linked to RPI or – often preferred by tenants – CPI. This method can result in more gradual rent increases over time, depending on inflation.
• For a shorter-term lease, or for the first three to five years, the parties may opt for a stepped rent, where the rent rises by fixed amounts each year. This can serve as an incentive.
• A fourth method is to include turnover rent provisions, commonly found in shopping centre retail leases. The review typically consists of a lower fixed rent element plus a ‘top-up’ based on the tenant’s turnover for the relevant financial year. The lease will include appropriate turnover disclosure provisions, ensuring that cash and off-site payments, gift vouchers, and returns are properly accounted for.

Service Charge

Where the lease is part of a multi-let building, each occupant will be required to contribute to the building’s running and repair costs through a service charge. Service charges can be a contentious issue – disputes may arise not only over the amount payable but also over which costs can legitimately be passed on through the service charge.

Often found towards the back of a lease (when you may be tired of reading the document), it is important to take the time to review the services covered, the amount chargeable, and any mechanisms for disputing charges. For example, energy costs may be excluded from the service charge (as they can be significant) and instead assessed separately.

The arrangements should aim to be fair. A tenant’s share of the service charge may be described in the lease as ‘fair’ or ‘fair and reasonable,’ or it may be set as a percentage based on the proportion of the total floor area they occupy.

Be mindful of green lease clauses, where landlords may attempt to pass on the costs of complying with their statutory obligations (or their own ESG commitments) disproportionately to tenants. Contributions should be proportionate to the tenant’s space and the length of their lease term. A service charge cap can be a useful safeguard, helping tenants manage both the scope of services covered and their associated costs

For further information and advice, please contact Nicola: nicolawood@bexleybeaumont.com  |  07359 709259

Or, please contact Emily: emilycarey@bexleybeaumont.com  |  07300 927480