the contents of a lease Flashcards
what is the code for leasing premises?
they are a set of guidelines/recommendations when negotiating a commercial lease
its purpose is to help tenants to negotiate leases, it is voluntary , but landlords are expected to follow it.
The code contains 10 recommendations: the most important one to know is recommendation 1:
recommendation 1: landlords must make offers in writing which clearly state the rent, the length of term and any break rights, security of tenure, rent review arrangements, rights to assign sublet and share premises; repairing obligations and the VAT status of the premises
what is the term and break clause?
term= length of a lease
break clause = option to terminate before the end of its term (break)
extra info:
commercial leases generally fixed for a term (7 years)
tenants have automatic right to renew a lease following the end of the term unless parties expressly exclude it. (security of tenure)
option to terminate the lease before the end of its term known as a break clause. tenant or landlord can terminate the lease on a certain date. notice to be served six months before break date
what are the standard contents of a rent clause for a commercial lease?
monthly/quarterly rent. rent may be reduced if premium paid upfront.
might be a grace period for the rent if tenants misses rent date. if rent not paid after grace period- interest will be charged
landlords can choose to charge VAT on rent, if they do they must opt to tax the property
tenant will try and negotiate the right of a suspension of payment of rent if the premises, or access to it, is destroyed or damaged by something covered by insurance.
what are the standard provisions of repair covenants in the lease?
the tenant will be required to repaid and decorate the premises during the term and then hand it back to the landlord in repair at the end of the term.
What negotiating position should the tenant take with respect to repair covenants
- avoid improvement language for replacement of fixtures and fittings - should be of the same kind
- T should get a surveyor at the start of the lease to inspect the property and report on its condition. this should be scheduled in the lease so that T only needs to maintain the condition throughout the lease - the tenant therefore avoids any obligation to renew or rebuild
- tenants should push only so that they have to keep the property in a better state than they found it
- T will want to exclude damage for fair wear and tear and any liability for damage caused by latent defects in the property
- should not repair any damage as a result of an insured risk
- for yield up and repair - get this clause removed or have the assessment of property subject to a surveyor’s reasonable opinion
what are the common insurance provisions in a lease and what should the tenants push for?
the landlord will take out insurance + charge the tenant the premiums : L will covenant to take out insurance; T will covenant to pay for that insurance
T should make sure the following:
- a list of the stuff that is insured
- insurance covers full reinstatement value
- the insurance is with a reputable insurance company
- L covenants to use any insurance money
- the insurance is taken out in both T and L’s names, so T is kept informed of the policies.
- T does not pay rent if an insured risk occurs that prevents their access to the premises
- A right of termination should the property become unusable and unable to be reinstated
what is an alienation covenant and what are the rules on its operation
Covers any dealing by T of their leasehold interest to another - incl. assigning or subletting. Two types of alienation: Absolute (not permitted) and qualified (permitted subject to L’s consent).
- Code recommends that :
- Alienation should be permitted, and consent should not be unreasonably withheld.
- L should not impose any circumstances or conditions unless the assignee is of questionable financial position
- T should not have to enter into an AGA unless A is of questionable financial standing.
what is a use covenant and what are its standard terms?
this is a covenant which restricts the ways a tenant can use premises. tenants are usually restricted to using the property only for the permitted use.
- the clause can be absolute (T can’t use Property for any purpose other than permitted use)
- the landlord is not permitted to charge for giving use consent but can recover any cost for granting consent and recoup any loss to the value of property as a result of granting the consent and change in use.
- the tenant should negotiate a clause that allows the premises to be used in a similar way to the way the tenants want to use it. but then allow for other uses subject to the landlord’s consent, not to be unreasonably withheld.
what is an alteration covenant and what is the law on this covenant.
a covenant that restricts the changes the tenant can make to the property. the lease will usually prohibit T from making any alterations whatsoever, subject to exceptions.
what is the rent review clause
Allow L to increase rent to the market rate after certain amount of time. This is to prevent L from being stuck on the rate agreed at the beginning of the lease when the market rate is rising
types of rent review
- stepped review
- increased based on T’s turnover
-Indexation
- L& T agree the rent themselves
- Open market rent review
what does the code recommend with respect to alteration covenants ?
- restrictions on alterations should be more restrictive than so as to protect the value of the property.
- L should not prevent T from making internal alterations to the property unless they affect the building in a major way
- L should not require T to make good any alterations at the end of the lease
what are ‘assumptions and disregards’
when an open market rent review is done, it is done by a surveyor. L and T will agree a set of ‘assumptions and disregards’ the surveyor must use when evaluating the market value of the rent. this is to ensure surveyor focuses on hypothetical valuation of the tenancy as is on the market
assumptions and disregards up for negotiation- T does not want them to be too positive or lenient on the property as it could raise the rent. Once the rent has been agreed between L and , they will enter into a ‘rent review memorandum’ to document the agreement of the new rent.
