Having agreed that you want to take on new commercial premises, you need to think next about the length of the lease and whether or not you will be able to renew it at the end of the original term.
The point about the length of a lease is that ordinarily, you cannot avoid some sort of liability until a lease comes to an end. In recent years, the trend has been for shorter leases so that Tenants can know that their obligations come to an end at a specific point whatever happens, rather than longer leases where the long-term risks are higher. Much will depend upon the retail environment where we are dealing with shops or the commercial environment generally where we are dealing with larger Units. The restaurant/public house sector is also high risk and long leases will often be ill-advised.
Given that banks rarely lend on commercial leasehold properties these days, leases of 3, 7, and 9 years are relatively common. They may also include “break clauses” which enable a Tenant to terminate the lease early upon giving notice.
There is a slight administrative advantage in having a lease which does not exceed 7 years, in that leases that are longer in length require registration at the Land Registry. In addition, the Land Registry have requirements as to the format of the Lease and the standard of the plans that accompany it. Those requirements (and in particular the plans, may be troublesome and result in higher administration costs whether borne by the Landlord or borne by the Tenant if that is part of the deal.
The other major factor to take into consideration is whether at the end of the original term you have a right to renew your Lease for a similar length of time and broadly along the same terms subject to the rent being adjusted to what is fair and reasonable in the open market. This is a general right established by the Landlord and Tenant Act 1954 Part II but it is possible to circumvent the effect of the Act by means of agreement between the parties. Roughly 50% of the leases that we deal with are excluded from those rights under the Act. It is worth pointing out that even where you have a right to renew, there are circumstances where that right may not apply.
All circumstances are going to be different. If the premises need a lot of investment by the Tenant, the Tenant may feel that a longer lease gives him greater security to get a return on his investment. If it is a self-contained, easy to maintain unit, most Tenants will be looking for the shortest lease available. In other cases, the location of the premises is absolutely critical and long-term security is essential.
In my next article I will deal with the question of who pays for the lease. If you would like any further information on this subject please do not hesitate to contact the writer or any other member of the Commercial Property Team.