Top tips for landlords granting commercial tenancies
10 December 2021
If you are a landlord what key points should you think about before granting a lease of your commercial property?
Who is the proposed tenant?
It is important that you or your advisor check the ‘covenant strength’ of the proposed tenant. Look at its accounts. Is it likely to be able to pay the rent and meet the other financial obligations that will be imposed by the lease? What steps can you take at the outset to protect yourself financially in future?
Whether your tenant is an individual or a company you could ask for a rent deposit. This is a sum of money that a tenant provides to a landlord as security for payment of the rent and performance of the tenant’s covenants in the lease. A rent deposit deed will sit alongside the lease and set out the circumstances where a landlord can draw against this money and where the landlord must repay the deposit. It is particularly useful when a tenant has weak financial status, minimal or no UK assets or is a new company with no track record of paying its debts.
If the tenant is a limited company, you could seek a personal guarantee from a director/shareholder, where they guarantee the performance of the tenant’s covenants. However, people can be reluctant to give personal guarantees and they are only as good as the financial strength of the person giving them.
How much rent should you charge?
We recommend you obtain a professional valuer’s opinion on the amount of rent that you should be charging.
Do you also want to be able to review the rent in future? Most market rent leases allow the landlord to review the rent every 3-5 years.
There are different types of rent review (e.g. open market rent based on comparables or increases in line with RPI). Most reviews will be ‘upwards only’ meaning that after you review the rent, if it would mean the tenant paying less than what it pays currently, you can continue charging the current rent.
This section relates to annual rent. Leases often also reserve other types of rent e.g. insurance rent (where a tenant pays to the landlord a proportion of the cost of insuring the building) and service charge (where a tenant pays to the landlord a proportion of the cost of maintaining common areas. e.g. a car park/ corridors).
Should the tenant have security of tenure?
Business tenants automatically have the benefit of security of tenure legislation unless the lease specifically excludes it.
Security of tenure (under the Landlord and Tenant Act 1954) means that at the end of the lease term tenants have rights to remain in the property, rights to renew the lease and to apply to court to settle the terms of the new lease if they cannot be agreed with the landlord. There are certain circumstances where the landlord can obtain possession at the end of the lease term despite the tenant having security of tenure but these are very limited and require proof of relevant facts.
If you do not want your tenant to have renewal rights, the lease must be ‘contracted out’ at the outset, following a specific procedure. You should seek advice on this before you grant the lease and allow the tenant to occupy the property.
What state do you want the property to be in when the lease ends?
Do you want the tenant to have a full repairing obligation? A full repair obligation can include an obligation on the tenant to put the property into good repair, even if it is not in good repair when the lease begins. Tenants might resist this obligation, particularly if the property is not in good repair. It is best to agree the repairing obligation with the tenant as early as possible. If a tenant requires a limited repairing obligation a photographic schedule of condition will need to be prepared. The lease will state that the tenant is not required to return the property at the end of the lease in any better condition than is shown in the photographs.
If you are granting a lease of only the internal area of part of the building, generally you will be responsible for repair of the structure of the building. You might require the tenant to pay service charge, contributing towards the cost.
The tenant might want to alter the property. The lease will need to state whether you can require the tenant to remove alterations when the lease ends.
What else do you need to think about?
This list is not exhaustive and there are other important considerations including your future plans for the property (to secure a mortgage against it or sell your property subject to the lease); whether you need consents before granting the lease (e.g. from your lender or your own landlord if your interest in the property is leasehold); the flexibility of the alienation terms (can the tenant assign/ sublet the whole/separate parts of the lease?); and any break rights.
Landlords and tenants will be bound by the terms of the lease including terms implied by law. We would always recommend that you seek legal advice before granting a lease.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at December 2021.