Your Complete Guide to Leases: Negotiation

Not sure whether the terms of a lease are fair? What should you be looking for when negotiating?

In part one of our Complete Guide to Leases series we discussed the importance of Heads of Terms and during the first stage of a lease transaction. So what comes next? Real Estate Partner John Leasure outlines the negotiation phase of a lease transaction and the key terms you should be looking for.

What comes next?

The next stage is the legal negotiation between solicitors. A form of lease will be drafted, usually by the landlord solicitors and, depending on the Heads of Terms, perhaps also a rent deposit deed or a licence for alterations. These documents will then be reviewed and commented on by the tenant solicitors.

Lease terms to be aware of

One of the key provisions for both parties to consider is whether the lease is to benefit from the security of tenure under the Landlord and Tenant Act 1954, which can be summarised as whether the tenant should have a statutory right to renew its lease when it comes to the end of the term. It makes a huge commercial difference to the parties, and therefore it is one of the most important terms to be documented by the lease.

Another important term is the tenants’ repairing obligation. It is usual for landlords to want tenants to keep the premises in what is known as ‘good insubstantial repair and condition’. This is a legal way of saying the tenant must repair any damage to the premises other than any damage caused by an insured risk.

What happens if the premises to be leased aren’t in good condition?

If the premises were to have damp or broken light fixtures, stained carpets, or damaged windows, and the tenant agreed to a good and substantial repairing covenant, the tenant would be legally responsible for carrying out any necessary remedial works at their own cost.

Most tenants would find this very unfair and therefore when they are taking premises that are not in a good condition, they try to agree that their repairing obligations are limited by reference to a schedule of condition.

What is a schedule of condition?

A schedule of condition is simply a series of photographs or textual descriptions, or perhaps both, which specifically list any issues or damage to the premises, when the lease is granted. The tenant is then not required to repair any of these items.

What other specific lease negotiation points should parties be aware of?

The landlord will want to ensure it can recharge the tenant for any cost relating to insuring the premises. This should be done by way of a separate payment, which is equivalent to the money spent by the landlord on insurance. Similarly, for multi-let buildings such as office blocks, shopping centres, or high street shops sharing common service yards, landlords should make sure the lease includes service charge rent. This allows landlords to be sure that they can recover the cost of carrying out necessary repairs to common areas – maintaining and repairing the structure of the building most significantly, but also perhaps re-tarmacking service yards, providing supplies and utilities to common toilet facilities, servicing elevators or escalators, salaries and employment costs for a building receptionist, or even security measures such as CCTV. All of these costs can quickly add up, so it is vital landlords ensure they are not exposed and have to pay for these costs themselves.

Are there any other lease terms prospective landlords and tenants should be aware of?

Lease assignment provisions. An assignment is a legal term for a transfer. In this case, the transfer of the lease from the tenant to a third party. Whilst the identity of the tenant changes, the lease terms remain the same. It is usual for leases to include very detailed legal drafting covering assignments. Landlords should make sure their consent is required for an assignment and that the financial standing of the incoming tenant is sufficient. A landlord does not want a new tenant who can't afford to pay the rent. Tenants should consider the circumstances in which they might need to transfer the lease, perhaps to a group company as part of a corporate restructure. Such events are increasingly common given the challenging financial environment, particularly for retail businesses, and tenants therefore need to think ahead and try to include as much flexibility in their leases as possible.

If you would like to know more about leases or Heads of Terms, Hamlins’ Real Estate team can assist with your queries. Please contact John Leasure for more information.