Why letting agreements should reflect your long-term plans
When a commercial property has been empty for a long time, landlords often turn their focus to how they can get income back through the door.
Agreeing on heads of terms quickly can feel like progress, but it is also the stage at which landlords can lock themselves into arrangements that won’t fit their needs in a few years’ time.
Before agreeing on how a property will be let, landlords should think about what they actually want from the building in the longer term.
Planning for the future
The UK does not currently have a strict legal minimum or maximum length for a commercial property lease. However, most commercial leases range from three to 25 years.
When we talk to clients about the length of lease they want to propose, one of the most important questions we ask them is where they see the property in five or ten years.
Lease terms are generally negotiated between the landlord and tenant (often via their respective surveyors) and the parties are free to negotiate whatever terms they wish (within the law and within reason).
Some landlords are content with a long-term investment and want the stability of income this offers, while others see letting their property as a temporary solution.
For instance, the landlord may intend to occupy the building themselves in a couple of years or carry out substantial refurbishments once circumstances allow, in which case, they will need the tenant to vacate at the appropriate time.
Landlords should carefully address those intentions in the lease terms from the outset.
Security of tenure
One of the choices landlords need to make is whether to grant security of tenure.
Under the Landlord and Tenant Act 1954, business tenants normally have security of tenure – the right to stay in their business premises when the lease ends. However, parties can “contract out” of these security of tenure provisions if they agree to do so before the lease is granted.
If a lease is ‘contracted out’, then the tenant will have no right to stay in the premises when the lease ends and must leave the premises unless the landlord chooses to offer another lease.
The tenant would be unable to claim compensation for the loss of the business premises unless the lease specifically gives this right. Even if the landlord offers the tenant another lease, the tenant will have no right to ask the court to fix the rent.
Where a lease is protected by the 1954 Act, the tenant has the right to remain in the property at the end of the term under the same lease conditions and a right to request a new lease under similar terms as the existing lease.
The tenant would also have the right to ask the court to fix the rent (if the landlord and tenant cannot agree on the new rent).
If a landlord wants the property back at the end of the term, a lease contracted out of the 1954 Act may be more appropriate.
This allows the landlord to recover possession upon the lease’s expiration.
Ask the experts before making your decision to let a property
Break clauses, shorter terms and contracted-out leases can all be used to align a letting with future plans for the property, provided they are considered early and drafted properly.
If you are unsure how long you should lease your property for or what terms you should include in the agreement, get in touch with our commercial property team.
