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Commercial Property Frequently Asked Questions

Commercial Property

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What is a Commercial Lease / Sub Lease?

The Commercial Lease

A lease in which the Lessee (or Tenant) has entered into the lease transaction with the Lessor (or Landlord) for business or commercial purposes. This is called a business or commercial lease.

A lease is a legally binding agreement between the Lessee(s) and the Lessor(s). It usually contains all the terms that the lease will be subject to. It usually dictates the specified period (the ‘term’) of the lease, the rent payable, and it lists the rights and obligations of the Lessee and the Lessor.

Drafting a good and sound Lease is very important to prevent possible future disputes.

Lease are recognised by law and are the only way an agreement can be enforced without referring to the Court (though there are certain specific procedures that still require application to the Court).

It is always advisable that you have the Lease explained to you by an independent solicitor before signing the Lease. There are often other documents related to the Lease, which also need careful consideration before signing.

The Commercial Sub Lease (or ‘Under Lease’)

Most leases of commercial buildings give the tenant the right to sell the lease (see page on The Assignment of a Commercial Lease) and some will permit subletting.

Subletting means that the tenant grants a new lease out of the tenants lease. If this is done then the tenants lease (from the freeholder) is generally referred to as the 'Head Lease' and the lease granted out of that is called the 'Sub Lease' or 'Under Lease'.

A Sub Lease cannot be granted for a term that exceeds the term of the Head Lease. Subject to this point, whether or not a sub lease can be granted depends on the Head Lease terms - if the Head Lease is silent on the point then there is no restriction on the grant of a Sub Lease. More often though the Head Lease will permit a Sub Lease to be granted subject to it complying with certain conditions laid out - and subject to the landlords consent.

Usually the easiest way of granting a Sub Lease will be to grant a lease by reference to the Head Lease - i.e. a lease in which you set out the rent and term but otherwise import into it all the same terms as are in the Head Lease. This should pass on to the sub tenant all the responsibilities of the tenant - though of course it does not relieve the tenant of those liabilities to the landlord - a direct contract remains between the Head Landlord and the Head Tenant.

In the grant of a Sub Lease it means that there are generally two documents required:

  1. the Sub Lease itself; and
  2. the License to Sublet – this is granted by the landlord

The same conditions regarding registration requirements and SDLT apply to a Sub Lease as they do to a Lease - see http://www.hmrc.gov.uk/so/sdlt/index.htm#1

As in the situation of a Lease, if further security is required against performance of the sub tenants obligations then the tenant may wish to consider taking a rent deposit.

Beware - leases are substantial and often complex documents. You must be aware that some Head Leases will set out various requirements that have to be observed in the way in which the Sub Lease is to be drafted.  We recommended that you consult one of our specialist Solicitors, who can give you clear and thorough advice on the best way to deal with the assignment and registration of the Sub Lease with the Land Registry for you.

Is it necessary?
The use of a good drafted commercial Lease or Sub Lease is crucial if you want to prevent possible future disputes.

If the other party does not comply with the terms of the Lease, then the Lease will provide certain remedies such as arbitration that avoid costly proceedings through the Courts. If the in-built procedures do not help any given situation, then there is provision to refer a dispute, such as for rent, to the Leasehold Tribunal.

Sub Leases require a further document called the ‘License to Sublet’, and this is granted by the Landlord. Whether you are a landlord or a tenant, you will need a well drafted License that will meet the requirements and avoid possible disputes arising in the future.

What are the usual terms?

Where there transaction concerns a new Lease, the first step of the process will involve the parties agreeing (in principle) to Heads of Terms for the Lease.
All new Commercial Lease matters require an outline of the basic terms that need to be agreed at the outset, to ensure all parties are aiming for the same goals. This is best dealt with in a document called the 'Heads of Terms'.
The Heads of Terms usually outline in general the following terms, although this list is not exhaustive:

  1. The parties to the Lease
  2. Identification of the property to the Lease
  3. Any Guarantor to the Lease
  4. The legal representatives for each party
  5. The term / length of the Lease
  6. The proposed use of the property
  7. The rent payable and the frequency of payment (i.e. whether monthly or yearly in arrear or in advance)
  8. Rent Reviews – how often the rent will be reviewed and increased/reduced accordingly
  9. Repairs – general repair clauses for the Tenant
  10. Costs payable by the Tenant to the landlord during the term of the lease (including Estate Charges, utility bills, etc)
  11. Insurance of the property
  12. Business Rates
  13. Security of tenure. When the lease ends, whether the Tenant will be entitled to the grant of a further lease, in accordance with the Landlord and Tenant Act 1954.
  14. Legal Costs – whether the Tenant will pay the Landlord’s legal costs in relation to the transaction.
  15. References for the Tenant
  16. Other terms that are crucial to the granting of the final lease
  17. The Rent Deposit. Payable at the commencement of the Lease.
  18. The Lease Break Clause. When the lease can be ended by each party and the notice period required for doing so.
  19. When the lease can be forfeited
  20. Fixtures and Fittings; the Inventory to the Lease.
  21. The Plan. Usually attached to the heads of terms.

The Lease will be subject to the Landlord and Tenant Act 1954 (as amended by The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003).

Note: Sub Leases require a further document called the ‘License to Sublet’, and this is granted by the Landlord.

Why do I need a solicitor?

We have Specialist Commercial Solicitors who can provide you with legal advice on Commercial transactions wherever you are – we do not need to see you and we can correspond by email so our Solicitors can help move the transaction along swiftly without the delays associated with postal correspondence!

The Lease contains essential elements of the agreement between the Landlord and the Tenant. It regulates the very foundation of the agreement between the parties and sometimes more importantly, governs what happens if it all goes wrong. This is important if the other party does not fulfill its side of the bargain. You will then have a written agreement – i.e. the lease - to rely on.

A good amount of skill and expertise is required when drafting or advising you on the lease, and often it can take several attempts before both parties are happy with the final lease.

Various legislation applies to Leases. In particular, the requirements of the Landlord and Tenant Act 1954 (as amended by The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003) must be met.

Aside the legislation, there are administrative rules that need to be complied with, such as correctly dating and signing the Lease.

At Lawdit, we have trained Solicitors who can help ensure that you have the perfect lease, which will offer you the correct protection and which meets the rules and regulations that specifically apply to it.

How much will it cost?

It is often difficult to estimate the amount of work that will be involved with any given lease transaction, as each transaction is different.

We guarantee you will not be charged more than the amount of legal fees which we agree with you at the outset.

We can advise you wherever you are in the UK. We do not need to see you.

As a general guideline, our legal costs (only) start at £1,250.00 plus VAT. Our legal costs do not include any disbursements related to the transaction and accordingly these will be extra.

Alternatively, please contact us and one of our experts will be happy to discuss the anticipated costs with you.

Payment must be made on account and we can accept payment by cash, cheque or credit card.

What if I am not happy with the Lease Terms?

If you are not happy with all the Lease terms, there is some room for negotiations and we can seek to negotiate them for you. We are well experienced in knowing the best way to negotiate for you.

When will I pay / receive the rent?

Usually, a simple lease transaction does not include any consideration or ‘premium’, as the purpose of the lease is for the Tenant to use the property in exchange for a rent paid to the Landlord. On completion of the Lease, any rent deposit and first rent payment is usually due to the Landlord.

However, if the transaction includes a transfer of an existing business then a ‘Premium’ may be payable for the goodwill element of the business and any items included in the sale. This will require a separate Agreement between the two parties and the Premium is payable upon completion of the transfer with the first rent and any Rent Deposit due.
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