By Austin Lafferty, Partner / Director, Austin Lafferty Solicitors
Many business owners fall into difficulties with a commercial lease because they assume it is much like a residential one.
If you don’t want to get bogged down in the minutiae of a commercial lease, let this be the main learning: nearly all of the responsibility lies with the tenant, which means that they should not enter into any agreement without fully understanding what it is they are signing up for.
The pandemic has been the catalyst for many owners of businesses both large and small to review whether their current lease is suitable now or for the future: changes in working patterns and habits and the economy may mean a change in location or premises for both staff and business owners.
Before leaping from the frying pan into the fire, there are common issues in commercial lease agreements that arise over and over again:
If you change your mind about your lease and want to leave early, there’s probably not a lot you can do about it. Neither party can terminate it before the agreed timeframe without the other’s consent. Even if you can find a replacement tenant, the landlord has to consent to you leaving and if they say no, you are there for the long haul.
Get me outta here
Some contracts will include what is known as an early termination or break option. Landlords do not have to include this in their lease agreement and the more unique or more in demand the premises, the less likely there are to do so.
It’s important to be aware that this clause can only be applied when the tenant has met the other terms of the agreement in full. If for example you are a day or two late with the rental payment or have not carried out the agreed maintenance, the landlord is within his or her right to refuse the early termination.
This is one of the ways in which commercial lease agreements differ most dramatically from residential leases – the upkeep, repairs and maintenance are the responsibility of the tenant. Yes – you read the correctly – the tenant! The landlord should insure the property but from the second you enter the contract to the moment that you leave, the tenant must budget for and carry out the upkeep of the property.
You’ll have to pay business rates if you use a building or part of the building for non-domestic purposes i.e. a shop, office factory, warehouse etc. Don’t assume that because the landlord owns the building, he or she is responsible. In the majority of cases, it’s the tenants who pay. There are some exemptions and rate relief for very small premises but for larger buildings, it’s important to factor this into the business’s budget.
It is the tenant’s responsibility (can you see a theme developing here?) to remedy any defects and leave the property in good condition when they exit the premises. However, if they took over the unit in a poor condition, they are still obliged to do the repair work – even if it wasn’t their fault.
A building survey is the tenant’s best assistance or defence in seeking to negotiate a limitation on the dilapidations.
Photographic schedule of condition
It can also be helpful to add a photographic schedule of condition to the lease, which acts as a visual record of the state of the premises at the commencement of the agreement.
This helps the tenant limit the work that may need to be undertaken at the end of the lease in returning the premises to the landlord in no worse condition than shown in the schedule of condition.
Schedule of dilapidations
Once an exit date has been set between the tenant and landlord, the landlord will issue a schedule of dilapidations or in layman’s terms, a list of repairs.
If agreed in advance, by way of a survey or schedule of condition, the tenant can sometimes limit the work that needs to be done. However, without this documentation, the landlord can deny there were any defects or disrepair when the tenant took over and the tenant will have no right to reply.
Yet more responsibilities
As a tenant, you really are on your own once you take over the lease of a property and that puts you responsible for health and safety, asbestos control, fire safety, public liability insurance, gas and electrical certification.
It may be possible for the tenant to ask the landlord to rectify these areas in advance of taking over the lease if there is something wrong but once you’re in – guess what? – it’s your responsibility again.
On the whole, it makes sense for the business to be the tenant and not the individual owner – particularly in the case of limited companies as all legal liabilities fall on the company alone. If for any reason the business is no longer a going concern, the landlord can only chase the company for recompense and not the owner.
Unfortunately, a tenant cannot suddenly make the decision to leave the premises, the correct notice needs to be given to the individual or business named on the contract in the correct way.
If a tenant does not terminate the lease within the agreed terms of the lease agreement i.e. with sufficient notice, it will continue under what is known as ‘tacit relocation’ for a period of one year.
Stamp Duty or Land and Buildings Transaction Tax (Scotland)
Stamp Duty or Land and Buildings Transaction Tax (Scotland) is often payable by the tenant at the point they take over the lease.
It’s a graduated tax, so the higher the rent and/or the longer the lease, the more likelihood there is for tax liability. It is important to know before committing to a lease whether stamp duty or LBTT is due, how much is due and when payments needs to be made.
This very-much abridged list of the terms, conditions and clauses that are present in commercial lease agreements, should give tenants a small insight into the issues they may face when seeking a new premises.
Most landlords have a solicitor working on their behalf to ensure their properties are protected from misuse by their tenants, and so it follows that contracts err in their favour. It’s always best to take a cautious approach to a new lease and if in any doubt, tenants should also seek legal advice to protect themselves against unfavourable terms or large expenses when they serve notice.
Austin Lafferty is a Scottish law firm founded by Austin Laffery himself – a past President of the Law Society, Scotland. For over 30 years Austin Lafferty’s highly respected team of lawyers and solicitors have been supporting tenants in negotiating fair and robust commercial lease agreements.