Commercial Property Legal Dictionary

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a

Abandonment

Voluntarily discarding or abandoning a property and becoming indifferent as to what becomes of it.

Alienation

The transfer of an interest in property from one person to another, so as to deprive the original person of any rights it held prior to the transfer.

Alterations

Changes to the property, usually of a permanent nature, which will require the express written consent of the landlord, together with an indemnity in respect of any damage which may occur. Non-structural alterations, such as temporary partitions which can be easily removed on the expiry of a lease term, will not usually require consent.

Amortisation

The repayment of a debt over time by way of equal instalments that include interest at regular intervals.

Appreciation potential

The potential for a property to increase in value during the period it is held.

Arbitration

A dispute resolution method overseen by one or more independent third parties (arbitrators) and not by the courts. An arbitrator is appointed by the parties in accordance with an arbitration agreement or, in its absence, by default by a court.

Assessed value

The value attributed to a property by a tax assessor.

Assignment

The transfer of rights and obligations under a lease by one party (the assignor) to another party (the assignee). The assignor will remain liable for the original lease unless expressly released by the landlord.

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b

Break Clause

A break clause allows for one or both parties to terminate the lease on a specific date or dates during the lease term. The inclusion or omission of a break clause will depend on the needs of the landlord and the tenant, whether the former is seeking security and whether the latter may look to expand its operations beyond the premises of the landlord.

Building lease

A lease which obliges the tenant to erect buildings on the leased land. The buildings become the property of the landlord after the lease expires.

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c

Capital expenditure

A property improvement that is not an operating expense for tax purposes, it adds value to the property and depreciates over time.

Capital value

The monetary value of commercial property at a given moment in time, ignoring the potential for the value to change in the future.

Capitalisation rate

A percentage that assesses the value of an income-producing property in relation to its future income.

Class Uses

The purpose for which property may be used without permission being sought from the local council. Changes to use within the same class do not usually require permission. The classes are:
A1 Shops
A2 Financial and professional services
A3 Food and drink

B1 Business (excluding businesses that fall into class A2)
B2 General Industrial
B3 & B7 no longer used
B8 Storage or distribution

C1 Hotels and hostels
C2 Residential institutions
C3 Dwellinghouses

D1 Non-residential institutions
D2 Assembly and leisure

Common area maintenance

Charges paid by tenants for the maintenance of areas for the use and benefit of the tenants.

Contracting out

Entering into a lease without security of tenure provisions afforded to business tenants under the Landlord and Tenant Act 1954

Covenant

A promise made in a deed which can be enforced by the parties of the contract; most frequently used to restrict the activities of the tenant.

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d

Deed

A written document that is signed in order to grant title to real property.

Demised premises

The extent of premises subject to a lease, sometimes referred to simply as the demise.

Depreciation

The loss of value of a property, usually over a period of time.

Distress for rent

The seizure and sale of a tenant’s goods by a landlord to cover any rent arrears.

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e

Escrow

The deposit of documents, funds and other securities with a secure third party (an escrow agent), held under the terms of an escrow agreement. Defaulting on the terms of the escrow agreement will result in the escrowed property passing to the other party.

Estimated Rental Values (ERV)

An opinion as to the open market rent of a property at a particular point in time.

Estoppel

A principle in English law that a person cannot deny the truth of a statement they have made or cannot go back on something they have previously said. The denial must have been acted upon by another party (usually to their disadvantage) or their position must have been altered as a result.

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f

Forfeiture

A forfeiture provision will allow for the landlord to retake possession of the premises and to terminate the lease. This will only be allowed where there is a breach of a covenant by the tenant. This procedure will have consequences for both parties and given the serious repercussions stemming from it, should not be taken lightly. Advice should be sought from a solicitor on the forfeiture process.

Freehold

One holding an estate in "fee simple absolute in possession".

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g

Ground Lease

A lease of land only.

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h

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i

Indexation

The regular adjustment of an economic variable (rent) according to an index (inflation).

Index lease

Where the rent of a lease is determined by changes and movements in a price index, usually the consumer price index.

Institutional lease

An agreement for the use of Crown land for human development activities. It is only issued to an organisation that seeks the non-profit promotion of educational, religious, moral, physical or social growth of persons.

Insurance

The landlord will want to ensure that one party, preferably the tenant, will have taken out a policy of insurance in respect of the property. The contents insurance will almost certainly be the sole responsibility of tenant, whereas the landlord will often take out buildings insurance. The exception is in relation to plate glass, where the landlord will often want the tenant to take out an insurance policy. This is because plate glass is very expensive to replace, with the insurance premium reflecting this. The tenant may be able to induce the landlord to pay this if steel shutters are fitted to protect the plate glass windows.

Interim rent

Rent that a landlord can request a court to fix for when he has given notice of termination to a tenant or when the tenant has applied for a new tenancy.

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j

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k

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l

Landlord

The owner of the property subject to a lease.

Lease

A contract in relation to land and property that binds that parties to it. The landlord will grant the tenant exclusive use of the property in return for periodic payments (rent) for a defined term.

Lessee

The person to whom a lease is granted (Tenant)

Lessor

The person by whom a lease is granted (Landlord)

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m

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n

Notice period

The specified time period within which one party may give notice to the other party of its intention to exercise a discretionary right under the lease.

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o

Obligee

The party that receives the benefit of the performance of an obligation by another.

Obligor

The party responsible for performing an obligation for the benefit of another party.

Off-balance sheet finance

Where a form of debt does not appear on the balance sheet as a form of liability. This conveys the finances as being more creditworthy and will make the business appear more appealing to shareholders and creditors.

Option to renew

A lease clause giving the tenant an option, at the end of the term, to enter into a new tenancy under the same terms as the expired lease, although the landlord will usually require the rent payable to be reviewed upon renewal

Over-renting

Where rent being paid exceeds the current open market rent.

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p

Personal property

Any property which is not real property.

Premium

A lump sum paid by the tenant at the outset for the purchase of a lease and which is separate from the rent payable under the same.

Privity of contract

The doctrine that confers rights and liabilities only on the parties to a contract.

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q

Quiet enjoyment

A covenant in which the landlord agrees that the tenant shall be allowed to peaceably enjoy the premises. It can be breached by an entry into, lawful expulsion from, or some actual disturbance in the possession.

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r

Rack rent

The yearly amount of rent that a tenant could reasonably expect to pay on the open market.

Real property

Land and any other capital improvements built on property.

Re-entry

Repossession by a landlord of land held under a lease which allows him to effect forfeiture.

Rent

This is perhaps the most important consideration for a tenant when deciding whether or not they would like to enter into a commercial lease. It is therefore important for a landlord to give adequate consideration not only to the amount of rent payable, but also the way in which payment is to be made and whether a rent-free period might induce a tenant into entering into a lease. The amount of rent will be determined by a number of factors and a good solicitor will have a sound understanding of market conditions, the type of property, its location and condition.

Rent passing

The current rent being paid by the tenant to the landlord.

Rent review

Rent reviews take place at regular intervals in leases, typically every three to five years. The purpose is to ensure that the amount of rent is fair in relation to market conditions which are unforeseeable at the time the lease is entered into. A landlord may wish to seek to include a rent review clause on an “upwards only” basis, whereas a tenant will most likely want the rent to reflect a fair open market value. A tenant will also want the rent review to take account of any work it has taken to improve the property, such as extensive renovations. This is an important clause of the lease because it will determine the impact on the parties at a later date.

Rental value

The fair market value of rent that a property is able to attract under the terms of a lease in the open market.

Repair obligations

Most landlords will expect a commercial property to acquire wear and tear with age and use and will usually make provisions in this respect. For other types of damage, however, a lease may require liability in respect of internal damage or for the whole of the property.

Restrictive covenant

An obligation created by deed that curtails the rights of an owner of land.

Reverse premium

A benefit (usually a sum of money) given to the tenant by the landlord as an inducement to enter into a lease.

Reversion

The interest in land of a person who has granted some lesser interest than his own but has not disposed of the whole of his own interest.

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s

Sale and leaseback

An agreement where the buyer purchases the property and immediately leases it to the seller.

Securitisation

The process of converting a pool of non-tradable assets into tradable securities (usually bonds) which are sold to investors in capital markets.

Security of tenure

Statutory protection given to business tenants that restricts a landlord's rights to obtain possession.

Side agreement

Terms agreed between the landlord and tenant which are not contained in the main part of the lease or contract.

Specific performance

Where a court obliges a defendant to carry out certain parts of a contact.

Subletting

Where a tenant rents property he is holding under a lease to another party (subtenant). The original tenant remains responsible to the landlord for the fulfilment of obligations under the lease.

Surrender

The mutual agreement between landlord and tenant to bring a lease to an end.

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t

Tenant

A person or business that holds possession of a property through a lease (a lessee).

Term

A lease, whether residential or commercial, is required to have a start date and an end date. The length of the term will depend on both the wishes of the landlord in relation to how they wish for their property to be utilised and the tenant’s business and long-term plans. Part II of the Landlord and Tenant Act 1954 provides “security of tenure”, so as to grant a tenant the right to renew on the expiry of the lease term, save in a number of exceptional circumstances. A commercial lease will need to contain a security of tenure clause in order for this to be relied on and this will largely be directed by the wishes of the landlord and the tenant.

Termination

The coming to an end of an agreement, it typically occurs as a result of the agreement between the parties expiring or through the exercise of rights by one of the parties to the agreement.

Turnover rent

Where the amount of rent is based on the annual turnover of a lessee’s business. Turnover provisions are commonly found in leases for retail premises.

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u

Upward only rent reviews

A lease clause stipulating a rent review to take account of the higher of the current rent or open market rent.

User clause

The lease will state the purpose for which the property is to be used. This will be largely determined by the type of business the tenant undertakes and the type of property which forms the subject matter of the lease. Greater flexibility in this regard will be beneficial to the tenant, but may cause the property to lose value if it is being used for something it was not intended to be used for. Changing the use may also require the consent of the local Council and legal advice should be sought from the outset.

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v

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w

Waiver

The act of abandoning or refraining from asserting a legal right.

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x

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y

Yield

The return on a capital investment that is usually shown as a percentage

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z