Leases - Tips for Landlords and Tenants

1. TIPS FOR LANDLORDS

Landlord Tip 1: The Landlord and Tenant Act 1954

This Act gives a business tenant the right to remain in occupation beyond the end of the fixed term. A landlord will have to offer the tenant a renewal lease unless they can demonstrate a statutory ground applies. This may not be possible. 

What can a landlord do? 

The Act won't affect a fixed term tenancy not exceeding 6 months. Therefore you could allow a tenant to use your empty shop premises for a couple of months (e.g. to trade over Christmas) without worrying about this Act as long as the lease contained no provisions to renew or extend the term beyond 6 months. However, if there was the remotest possibility that the tenant could be staying for longer, we would recommend you take advice to ensure that the lease is "contracted out" of the provisions of this Act. 

It may be tempting to offer the tenant a short term licence to occupy as this Act does not apply to licences. However, a landlord needs to tread carefully. Firstly, the Courts will look at the document very carefully to decide whether or not it has the characteristics of a licence. If the occupier has an exclusive right to occupy the premises (e.g. there is no limitation on their hours) and they pay a rent, a Court may well decide it is a lease not a licence. If a Court decides it is a lease, then the occupier potentially has the protection of this Act. 

Tip: If there is any chance your tenant will be around for 6 months or more grant them a "contracted out" lease. This means that the tenant will have given up their rights under the Act and you don't need to worry about whether your licence is actually a lease. "Contracting Out" is simpler than it used to be - you no longer have to make a Court application. However, we would recommend you take professional advice to ensure you comply with the procedure correctly. 


Landlord Tip 2: How much do you know about your tenant?

It sounds obvious but there is no point in granting a lease to a tenant who is likely to breach it. 

Tip: Ask for bank references and carry out credit checks on the tenant before committing to the lease. A professional valuer will be able to suggest practical ways of protecting your interest - e.g. by asking for guarantors or a rent deposit. 


Landlord Tip 3: Will you be able to break your lease?

At Tip 1 we explained how a landlord could find that a tenant's lease hadn't ended when he expected. A landlord also needs to be careful if they want a break right (i.e. a right to serve notice to end the lease early). 

Tip: Unless the Lease is "contracted out" of The Landlord and Tenant Act 1954, then the landlord may not be able to exercise their right to break. 




2. TIPS FOR TENANTS

Tenant Tip 1: What are your repairing obligations?

A lease obliges the tenant to "keep the Premises in good and substantial repair and condition". This sounds reasonable but needs to be treated with caution. It is known as a full repairing obligation - if the premises aren't already in this state of repair, the tenant will be obligated to repair them to this standard. This could be disproportionately expensive, particularly where the tenant is responsible for the structure as well as internal repairs or where the tenant is only taking a short term lease (e.g. a couple of years). 

A tenant also needs to be wary of "excluded risks" being risks which the landlord either does not or cannot insure the premises against (e.g. flooding if the premises are next to a river). The starting point in a lease is usually that the landlord will repair any damage caused by a risk they've insured against but, otherwise, all repairs are the tenant's responsibility. From a tenant's point of view, this could be very unfair - e.g. the tenant has a 5 year Lease; the premises flood incurring significant damage and the landlord's insurance doesn't cover flooding. In these circumstances should the tenant really be entirely responsible for reinstatement costs?

Tip: Define the extent of the "premises" (i.e. what the tenant is responsible for repairing) carefully. If the premises are new, ask whether there are any warranties available or whether your repairing obligation can be amended so the tenant isn't responsible for structural or inherent defects. If the premises are older, consider having a photographic schedule of condition setting out the standard of repair or an exception for "fair wear and tear". Take professional advice to agree a compromise on any repairs necessitated by "excluded risks".


Tenant Tip 2: Can you actually get out of your lease early?

A tenant will often negotiate a right to break the lease early on a specified date providing they give a minimum amount of notice. Tenants need to be wary of any pre-conditions attached to the right to break - if they don't comply, they'll lose the right to break. 

Tip: Take professional advice on serving a break notice. Leases typically have the provisions relating to serving notices separate from the break clause. If a tenant serves the notice on the wrong party or misses a deadline they could lose the break. 

Be wary of a pre-condition to a break right to the effect that the tenant does not owe any "rents" due under the lease at the break date. "Rents" could include service charge/insurance rent - what if these sums haven't been ascertained as at the break date? Likewise, it's easier than you might think to not comply with a pre-condition to give vacant possession. Never accept a pre-condition to the effect that the tenant is not in breach of their lease - a tenant could lose a right to break over something relatively minor (e.g. having used the wrong number of coats of paint when they last re-decorated). 

Make sure the lease states that the landlord is to refund any sums which the tenant has paid in advance for the period after the break date. 

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.