Real Estate: A Guide to Commercial Leases in NI
A commercial lease is a legally binding contract made between a landlord and a business tenant. The lease gives a tenant the right to use certain property for a business or commercial activity for a period of time in exchange for money paid to the landlord. Additionally, the lease outlines the rights and responsibilities of both the landlord and tenant during the lease term.
What are the important lease terms and clauses typically included in a commercial lease agreement in Northern Ireland, and what do they mean?
Wilson Nesbitt Partner Drew Nesbitt identifies and explains the main elements to expect in a rack rent commercial lease, while also highlighting the pitfalls to try to avoid.
What is a lease?
A lease is a form of tenancy. It must be for a specific term, afford exclusive possession and be executed as a deed. This can be compared with a licence which allows parties to share occupation and doesn’t have to comply with the formalities of a lease. It should be noted that the courts can look past the name of a document; a document that is called a licence may actually be a lease if it fulfils the criteria set out above.
A lease should always have a fixed demise. If a lease is varied to change the extent of the demise it is a surrender and re-grant and SDLT will be payable on the new lease subject to any reliefs available.
Rent is often set by comparing the premises on offer to other recent lettings of similar space in the same area. Whether it is £8psf, £30psf or more, in traditional asset classes, the question comes back to what was the headline rent in other recently agreed leases of comparable property in the same locality. To maintain the headline rent the landlord may be willing to include incentives such as rent free periods or contributions to carpets and floor boxes (in office lettings).
Duration of the lease
Leases can be for any duration. It depends on what the parties agree commercially.
A landlord often wants a longer term to help with its investment value whilst a tenant will want flexibility. Often that flexibility is through a clause which allows the tenant to terminate (or break) the lease after a certain period. Caution is required on drafting the clause to make sure it is able to operate in practice.
Open Market Rent Review
Depending on the deal and underlying asset, there may be rent reviews throughout the term, sometimes on a 5 year cycle and index linked or by reference to open market value. Different underlying assets have different mechanisms for review.
Repairs and Outgoings
Institutional leases often push all costs down to the tenant, whether rates, outgoings, repairs or otherwise. A tenant should consider the state of repair of the building and likely annual payments into any business plan before deciding to proceed with the letting.
The lease will often require the landlord to insure the building and the tenant to reimburse all costs incurred. If there is damage by an insured risk or, in Northern Ireland, criminal damage, the rent will often be suspended and the landlord will have a set period to claim for losses and reinstate the building. If it doesn’t do so within that period the tenant often has a walk away. Uninsured risks are often dealt with differently.
Assignment and Subleasing
There is often a qualified covenant on assignment and subletting in leases. This is on the basis the covenant strength of the tenant or occupier can affect the value of the reversionary interest in the property. On that basis, it is common for a landlord’s consent to be required before any assignment or underletting. The terms of these clauses should be carefully considered by both the landlord and tenant to make sure that they adequately protect their interests.
Service Charge and Common Areas
Where a unit forms part of a larger building or estate, it is usual for the tenant to have access to the common areas of that building or estate. However, given the tenant will have access, it is also usual for them to contribute to upkeep through a service charge. The landlord should make sure that the service charge provisions allow it to adequately recoup the costs incurred in providing the services. The tenant will want to make sure the service charge is not excessive.
Default and Termination Clauses
It is usual for a commercial lease to include a provision that states that the landlord can forfeit the lease if the tenant doesn’t pay the rent, breaches the terms of the lease or is insolvent. To forfeit a lease the landlord will need to serve notice and change the locks on the premises. The tenant may be able to apply for equitable relief in certain circumstances.
Rights of Succession
Under the Business Tenancies (Northern Ireland) Order 1996, a tenant of a business premises has a right to renew its lease in certain circumstances. Unlike in England and Wales, this can’t be contracted out of. When a lease is close to the end of its term, the landlord and tenant should consider whether the lease term should be renewed.