Three key clauses for Commercial Property Tenants to keep an eye on during the term of their lease

Entering into a new lease as a commercial property tenant can be a daunting experience and it may be difficult to understand which parts of your Lease are key to understand throughout your occupation. You may feel that once your lease has completed and you have the keys you do not need to look at your lease again until it expires. However, it is extremely important that as a commercial tenant you consider all the key implications that your lease creates after completion.

Is your lease renewable?

One of the key terms of your negotiation for a new lease would have been whether or not your Lease is renewable.

If your lease is not renewable, it will have a clause which will specifically state the Lease is excluded from the relevant provisions of the Landlord and Tenant Act 1954 (LTA 1954). You would also have signed a separate document called a Statutory Declaration confirming the lease is not renewable and you have given up your security of tenure rights under LTA 1954.

The effect of this clause on your period of occupation is that you will have no right to stay in the premises when the lease ends (when the term expires).  You can still request a new lease but this will be at the Landlord’s discretion. If the Landlord does not choose to offer you another lease, you will need to leave the business premises once the term expires otherwise, there may be trespassing implications.

On the other hand, if your Lease is renewable there will not be a clause excluding the provisions from the LTA 1954 and you would not have signed a Statutory Declaration before completion of the lease. The effect of a renewable lease at the end of the term is the lease will continue on the terms of the existing lease until either party serves notice proposing the terms of a new lease.

In both scenarios, it is key to ensure you make a note of when your lease ends and whether your lease is renewable or not and the implication of this on the end date of your lease.

Can you end your Lease early?

Your new lease may give you the option to end the lease early by serving notice on the Landlord before a certain date, otherwise known as the ‘Break Date’.

Your Lease will specify this Break Date and the conditions you will need to satisfy before the Break Date once notice is served.

It is important you make a note of this information after you enter into the lease as these provisions are extremely time-sensitive and exercising this option one day too late could be fatal.

The key points to note in your lease will be:

• The Break Date(s) – which are typically found in the Definitions section of your lease.
• The ‘Option to Break’ (or wording similar) clause that will detail the conditions needed to be satisfied on the Break Date to allow you to end the lease early.

It is  important you make a note of the required amount of notice you need to give the Landlord before the Break Date to allow you to end the lease early i.e. ‘the tenant may terminate this lease by serving a Break Notice on the Landlord at least six months before the Break Date’. In this example, if you were to serve notice less than six months before the Break Date, then you would lose your chance of ending the lease early.

Your lease will detail certain conditions that will need to be satisfied by the Break Date such as:

• Ensuring that you have paid by way of cleared funds any part of Annual Rent, Service Charge and Insurance Rent (plus any VAT) which was due to have been paid.
• You have vacated the Property and returned it to the Landlord free from any occupiers.
• There are no subsisting material breach of any of the tenant covenants in your lease relating to the state of repair and condition of the Property.

The above conditions are not an exhaustive list but highlight the main conditions that are likely to be found in your lease and you need to be confident these conditions can be satisfied by the Break Date after you have correctly served notice on your the Landlord to end the lease early.

The importance of not delaying Rent Review

Most modern leases will include provisions for a ‘rent review’ every so often during the term of the lease. For example, a rent review could be every third and sixth anniversary of the term if this was a 7-year lease. The rent is typically always going to be ‘upward’ only and it is important to make a note of these rent review dates after you complete the lease.

A rent review date might be missed during the term of the lease and you may think that as a Tenant it is better to stay quiet and not inform the Landlord of this. However, most rent reviews are on the basis that ‘time is not of the essence’ to allow the Landlord to backdate the rent review, if missed.

There will be provisions in your lease that deal with ‘Late review of Annual Rent’ whereby you will be liable to pay the shortfall (and interest on that shortfall) between the amount of the current Annual Rent you have continued to pay for the period from and including the actual Review Date (specified in the Lease) and the amount of Annual Rent for that period that would have been payable had the revised Annual Rent been agreed or determined on or before that Review Date.

Therefore, if the rent review is delayed by months or even years from the actual Review Date then you as the Tenant could be liable for a large lump sum in terms of the shortfall amount that would typically need to be paid within 10 working days of when the revised Annual Rent is eventually agreed.

It is therefore strongly advisable that you make note of the Review Dates and approach the Landlord in good time to trigger the rent review on or in advance of the relevant Rent Review Date to avoid a potentially heavy shortfall payment later down the line, if a review date is missed.

Conclusion

The above summarises some key takeaways that are important to consider once your new lease has completed and highlights the need to be wary of key dates during your period of occupation to ensure you are not caught out.