What are commercial leases?
A commercial lease is a legally binding contract between a landlord and a tenant allowing the lawful occupation of a building for a specific period of time.
The lease will document the agreed rent to be paid throughout that period of time, as well as the rights and responsibilities of both parties during the lease term.
Commercial leases are important because they essentially legalise the occupation of a tenant in a building, and make sure that both parties understand their responsibilities and liabilities, to avoid potential disputes.
In short, yes. Some business owners will purchase commercial property for their own business to occupy, this is usually purchased in a separate business entity and then let to the trading business.
No, but it is advised to establish a lawful occupation. In addition to a lease, a licence agreement can be put in place.
However, this only provides the right for a tenant to enter a property and can be terminated by either party within a short period of time. There are limitations regarding what a tenant can do in a property when under a licence agreement.
The Landlord and Tenant Act 1954 is an Act which provides security of tenure to a tenant of a commercial property.
For a tenant who stands to lose any goodwill or who has invested a lot of money in the building they occupy, they would want to ensure their financial investment is protected.
Prior to expiry of the existing lease, if either party would like to renew the lease, the Landlord can either serve a Section 25 Notice terminating the existing lease and offering a lease on new terms, or the Tenant can serve a Section 26 Notice to request a new lease.
Neither party can serve a Notice if the other party already has. Should the landlord want to take back possession of the building, they can only do so if their reasonings fall within the seven grounds under Section 30. The landlord cannot oppose a new lease ‘just because’ or if they don’t like the tenant.
If the lease was outside the Act, the tenant would have had to have vacated the building before expiry of the lease, otherwise their occupation after this date would be unlawful.
Whereas, a tenant who is protected under the security of tenure provisions can remain in occupation as long as no Notices have been served, this is referred to as ‘holding over’ and would continue on the same terms.
A commercial landlord can refuse to renew a commercial lease if the lease is contracted out of the Landlord and Tenant Act 1954.
If the lease is within the Landlord and Tenant Act 1954, they cannot refuse a renewal unless their reasonings fall within the grounds under Section 30 of the Landlord and Tenant Act 1954.
The answer to this depends on whether the tenant has security of tenure or not.
If the lease is contracted out of the Landlord and Tenant Act, it is recommended that discussions are had with the landlord/tenant six to twelve months prior to expiry of the lease, to ensure a further lease is put in place which will guarantee occupation for a further period of time.
This provides comfort to the tenant knowing they have occupation for a set length of time, meanwhile for the landlord, it adds value to the property by having a secure income stream.
From the view of the landlord, if the lease is within the Act and there has been appreciation in the market, a Section 25 Notice should be served no later than six months before expiry of the lease, or no earlier than 12 months prior, to ensure a rental uplift can be achieved at expiry.
If, however, the market has declined, it would be beneficial to keep the tenant holding over, in order to maintain the higher income stream. However, the market value of the property would be compromised due to reduced security as the tenant would only have to serve three months’ notice to vacate.
From the tenant’s point of view, if the market rent is higher than what they are currently paying, holding over would be beneficial, but if the market rent has declined, a Section 26 Notice would, in theory, ensure a lower rent is achieved at expiry. The best approach would really depend on whether security of income or occupation is preferable.
Legally, you do not need a solicitor to act on your behalf with commercial lease agreements.
However, due to the complexity of leases and the different matters and conditions covered in the lease, it is recommended that you instruct a solicitor to advise and make sure you are not signing up to anything which may have repercussions later down the line.
