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Why should a tenant use a solicitor in a commercial lease transaction?

Not understanding the legal implications of a lease's terms and obligations puts a tenant at risk. We look at the benefits of a solicitor's advice.

Commercial property building in steel and glass to signify a commercial property lease.

My colleague is currently acting for a prospective tenant taking a lease of space.  The landlord’s agent has been pressuring the tenant not to use a solicitor, saying that it will cost both parties more, delay the transaction and require a longer form of lease instead of a shorter template. Whilst those things may all be true, what might the tenant lose by not taking legal advice?

The short answer is that a tenant may sign a lease not understanding the legal implications of its terms, including numerous obligations they will be bound by, and not negotiating those terms to reduce their risk and ensure they have a marketable lease. In addition, they may miss the requirements to pay stamp duty land tax and (if the lease has a term of more than seven years) register their lease at the Land Registry. Basically, the tenant puts themselves at risk.

So what are the benefits of using a solicitor in a commercial lease transaction?

The key benefit of using a solicitor for your commercial lease is that your solicitor can negotiate the terms and advise you what it all means. A commercial lease can often run to 50 pages and unless you know what to look for, you may inadvertently agree to something you are not aware of.

Here are some examples:

  • Costs. A tenant is obliged typically to pay not only the rent, but also pay towards the landlord’s buildings insurance and, in a lease of part of a building, pay a service charge for services like building maintenance and repair. Your solicitor can explain how each liability works and ask questions about the likely costs.
  • Rights. Where you lease part of a building, your lease may need to grant you other rights. For example, the right to access the property over any common areas, the right to use communal toilets, the right to use parking spaces. Your solicitor can check what’s needed and what is missing.
  •  Repair. Most commercial leases contain an obligation on the tenant to keep the premises in good repair and condition. Seems simple. However, legally this implies an obligation to put the premises into good repair and condition if they are not already in that state. You might have no option to do that at the beginning of the lease, in order to operate, but you can avoid doing it again when you leave by asking for the lease to attach a schedule of condition. This limits a tenant’s liability, so that they need not improve the premises from how they are when they take the lease.
  • Break conditions. You may have negotiated the right to terminate the lease early, in case things change and you decide you don’t need the premises anymore. A break option typically requires you to give notice to the landlord (usually more than six months before the break date) and comply with various conditions for the break to be valid. These conditions may include that you have paid some or all the rents up to date. Again, this seems simple, but what does it actually require?

Payment of rents up to the break date will usually require you to pay all rents due before that date in full.  That means paying the previous instalment of annual rent in full, even if the instalment includes rent for days after the break date. The condition should be limited to payment of the annual rent, preferably not the service charge and insurance rent, and never the other rents or sums. Particularly, interest can be reserved as a rent; that might mean your landlord can challenge your break as invalid if you were late paying the rent once and interest accrued automatically (there is a 2011 case where £130 of interest had this effect).

Your solicitor will also carry out due diligence on the title, order searches and make enquiries on the property, to check you can use it for your intended use and assess what is missing for your legal compliance, for example an asbestos survey.

What are the pitfalls of not using a solicitor in a commercial lease transaction?

Let me illustrate with some real-life examples of the pitfalls:

  • A client sent us a copy of their lease and asked whether they could exercise their break option. Their lease contained a fixed break date, not a ‘rolling break’ allowing them to terminate the lease at any time after, which they had not appreciated.  As they had not served a break notice and complied with the other conditions before that date, the tenant will remain bound by the lease until its expiry (unless they can do a deal with the landlord to surrender it early or find someone to take an assignment).

Had this client understood the break option, they could have considered their requirements sooner and instructed us to complete the legal formalities to break the lease. An expensive mistake.

  • A tenant completed a lease directly with the landlord; neither party used solicitors. Months later, they asked us to help with stamp duty land tax (SDLT) and Land Registry They had not filed a SDLT return within the requisite 14 days, so there was a £100 fine; they had not paid the small amount of tax due, on which interest was charged in addition to the tax itself. In registering their lease, we also spotted a number of typos and incomplete formalities that had to be rectified.

In this case, thankfully the tenant did ultimately take our advice. Whilst there is a two-month deadline for a Land Registry application to register the lease, it is unlikely the Land Registry will refuse this particular application. Had the client not contacted us, their unregistered lease would not have been ‘legal’ and would only take effect in equity. This could, for example, have caused issues if the tenant wanted to assign their lease in future.

Conclusion

A commercial lease is a complex and important contract that can have a significant impact on your business and property. Therefore, it is advisable to use a solicitor in a commercial lease transaction, as a solicitor can help you understand, negotiate, and complete the lease agreement, and avoid any pitfalls that may arise.

If you are looking for a solicitor who specialises in commercial leases, please contact us.  We would be happy to assist you with your commercial lease transaction.

This article was written by Charles Hylton-Potts

Please note the contents contained in this article are for general guidance only and reflection the position at time of posting. Legal advice should be sought before taking action in relation to specific matters.

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