Leases – Tips for Landlords and Tenants

1. TIPS FOR LANDLORDS

Landlord Tip 1: The Landlord and Tenant Act1954

This Act gives a business tenant the right to remain inoccupation beyond the end of the fixed term. A landlord will haveto offer the tenant a renewal lease unless they can demonstrate astatutory ground applies. This may not bepossible.

What can a landlord do?

The Act won't affect a fixed term tenancy not exceeding 6months. Therefore you could allow a tenant to use your empty shoppremises for a couple of months (e.g. to trade over Christmas)without worrying about this Act as long as the lease contained noprovisions to renew or extend the term beyond 6 months. However, ifthere was the remotest possibility that the tenant could be stayingfor longer, we would recommend you take advice to ensure that thelease is "contracted out" of the provisions of thisAct.

It may be tempting to offer the tenant a short term licenceto occupy as this Act does not apply to licences. However, alandlord needs to tread carefully. Firstly, the Courts will look atthe document very carefully to decide whether or not it has thecharacteristics of a licence. If the occupier has an exclusiveright to occupy the premises (e.g. there is no limitation on theirhours) and they pay a rent, a Court may well decide it is a leasenot a licence. If a Court decides it is a lease, then the occupierpotentially has the protection of this Act.

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

Landlord Tip 2: How much do you know about yourtenant?

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

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

Landlord Tip 3: Will you be able to break yourlease?

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

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

2. TIPS FOR TENANTS

Tenant Tip 1: What are your repairingobligations?

A lease obliges the tenant to "keep the Premises in good andsubstantial repair and condition". This sounds reasonable but needsto be treated with caution. It is known as a full repairingobligation - if the premises aren't already in this state ofrepair, the tenant will be obligated to repair them to thisstandard. This could be disproportionately expensive, particularlywhere the tenant is responsible for the structure as well asinternal repairs or where the tenant is only taking a short termlease (e.g. a couple of years).

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

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

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

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

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

Be wary of a pre-condition to a break right to the effectthat the tenant does not owe any "rents" due under the lease at thebreak 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 apre-condition to give vacant possession. Never accept apre-condition to the effect that the tenant is not in breach oftheir lease - a tenant could lose a right to break over somethingrelatively minor (e.g. having used the wrong number of coats ofpaint when they last re-decorated).

Make sure the lease states that the landlord is to refundany sums which the tenant has paid in advance for the period afterthe 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.