Commercial property law specialist Stuart Darlington of Davenport Lyons looks at the leasing issues affecting small retailers.
There are many misconceptions about leased premises, and while some are relatively harmless, there are a number that may be particularly costly.
THE RIGHT TO A NEW LEASE
A common misconception is that you must vacate your premises at the end of the contractual term of the lease. In fact, if the lease was not excluded from the provisions of the Landlord and Tenant Act 1954, you will be entitled to a new lease, unless the landlord can prove certain grounds of objection - usually plans for redevelopment.
If you do not follow the strict procedures laid down in the 1954 Act you will lose your right to a new lease. However, if no action is taken by either party at the end of the contractural term, the lease will probably continue indefinitely on the same terms and at the same rent. In such a case, the landlord may subsequently apply to the court to determine the rent payable during the ‘period of continuation’, as it is known.
You can ensure that your current lease ends on the contractual expiry date, and that you do not incur any liability by either:
serving at least three months prior notice ending on the expiry date
moving out prior to the expiry date.
If the lease is excluded from the 1954 Act it will end upon the expiry of the contractual term and you must leave by that date. If you do not, you will be liable for:
market rent
service charge, insurance costs and outgoings
the landlord’s legal fees if the landlord takes action for recovery of the premises.
THE END OF THE LEASE
Does the end of your lease mean an end to your liability under the lease? Not necessarily. Most leases entitle the landlord to an indemnity for breaches of your lease obligations, whether or not discovered or claimed during the term. This is particularly true in the case of the obligation to repair. Leases often permit the landlord to recover the cost of rectifying disrepair, arising during the term, and removing your alterations, after the end of the lease.
However, bear in mind that although the lease may entitle the landlord to recovery of associated costs (e.g legal and surveyor’s fees), the actual costs of repair are limited in law to the reduction of the rental value of the premises as a result of that disrepair. Consequently, if there are tenants in the area prepared to take a lease of the premises at market rent and in that current condition, without any uncommon incentives, the landlord is not entitled to recover the costs. This obviously only applies to disrepair after the end of the term. Also, the period of recovery can often be limited (commonly to three or six months) after the end of the lease.
SELLING THE LEASE
Tenants often believe that liability under the lease ceases after its sale or transfer. Wrong.
For leases dated prior to January 1 1996 you will remain contractually bound to the landlord even after you have parted with the lease. If the purchaser defaults, the landlord can seek to recover losses from you. In most cases, this contractual bond is not released until the lease comes to an end.
For leases dated on or after January 1 1996, although you are released from your contractual bindings by law, if the consent of your landlord is required for sale or transfer, your lease will often, as a matter of course, require that you guarantee your purchaser’s performance of the lease obligations, although your liability will end when your purchaser sells the lease.
STATUTORY COMPLIANCE
Nearly all leases make compliance with statutory requirements one of the tenant’s obligations. This can involve great cost and may include the following, among other duties:
The Disability Discrimination Act 1995. Businesses that provide services to the public, where the public visit the premises - unless by appointment - must make ‘reasonable adjustments’ where physical characteristics of the premises may otherwise prevent access by disabled people.
The adjustments need only be reasonable and are considered in the light of the benefits provided weighed against the costs. You should remember that ‘disabled’ includes all disabilities and not just wheelchair users. If you cannot comply with the Act because of a legitimate reason, such as where you are not permitted to make changes, whether structural or cosmetic due to the terms of your lease, or the premises are in a listed building or a conservation area, you will have a defence against any action.
Liability for asbestos. New regulations came into force at the end of 2004 which require the carrying out of an asbestos risk assessment. If asbestos is found on the premises you will either be obliged to manage and contain it or, if the asbestos is deteriorating, remove it altogether.
Non-compliance is a criminal offence, punishable by a fine and/or imprisonment. A full survey, before taking a lease, should reveal the presence of any asbestos and other defects.
COMPENSATION FOR IMPROVEMENTS
Can you claim payment or compensation from the landlord for your expensive fit-out works at the end of the lease?
Statute does allow for the payment of compensation, but it is nearly always excluded from most leases.
You should also bear in mind that at the end of your lease your fixtures and fittings that are permanently attached to the premises are deemed to form part of them and belong to the landlord, unless provided otherwise by your lease.
If the landlord does not agree to their removal they must be left behind. Therefore, when taking a new lease you should ensure that you have the option to remove your fit-out works whenever you leave, regardless of whether the landlord asks you to do so.
There are many misconceptions about leased premises, and while some are relatively harmless, there are a number that may be particularly costly.
THE RIGHT TO A NEW LEASE
A common misconception is that you must vacate your premises at the end of the contractual term of the lease. In fact, if the lease was not excluded from the provisions of the Landlord and Tenant Act 1954, you will be entitled to a new lease, unless the landlord can prove certain grounds of objection - usually plans for redevelopment.
If you do not follow the strict procedures laid down in the 1954 Act you will lose your right to a new lease. However, if no action is taken by either party at the end of the contractural term, the lease will probably continue indefinitely on the same terms and at the same rent. In such a case, the landlord may subsequently apply to the court to determine the rent payable during the ‘period of continuation’, as it is known.
You can ensure that your current lease ends on the contractual expiry date, and that you do not incur any liability by either:
serving at least three months prior notice ending on the expiry date
moving out prior to the expiry date.
If the lease is excluded from the 1954 Act it will end upon the expiry of the contractual term and you must leave by that date. If you do not, you will be liable for:
market rent
service charge, insurance costs and outgoings
the landlord’s legal fees if the landlord takes action for recovery of the premises.
THE END OF THE LEASE
Does the end of your lease mean an end to your liability under the lease? Not necessarily. Most leases entitle the landlord to an indemnity for breaches of your lease obligations, whether or not discovered or claimed during the term. This is particularly true in the case of the obligation to repair. Leases often permit the landlord to recover the cost of rectifying disrepair, arising during the term, and removing your alterations, after the end of the lease.
However, bear in mind that although the lease may entitle the landlord to recovery of associated costs (e.g legal and surveyor’s fees), the actual costs of repair are limited in law to the reduction of the rental value of the premises as a result of that disrepair. Consequently, if there are tenants in the area prepared to take a lease of the premises at market rent and in that current condition, without any uncommon incentives, the landlord is not entitled to recover the costs. This obviously only applies to disrepair after the end of the term. Also, the period of recovery can often be limited (commonly to three or six months) after the end of the lease.
SELLING THE LEASE
Tenants often believe that liability under the lease ceases after its sale or transfer. Wrong.
For leases dated prior to January 1 1996 you will remain contractually bound to the landlord even after you have parted with the lease. If the purchaser defaults, the landlord can seek to recover losses from you. In most cases, this contractual bond is not released until the lease comes to an end.
For leases dated on or after January 1 1996, although you are released from your contractual bindings by law, if the consent of your landlord is required for sale or transfer, your lease will often, as a matter of course, require that you guarantee your purchaser’s performance of the lease obligations, although your liability will end when your purchaser sells the lease.
STATUTORY COMPLIANCE
Nearly all leases make compliance with statutory requirements one of the tenant’s obligations. This can involve great cost and may include the following, among other duties:
The Disability Discrimination Act 1995. Businesses that provide services to the public, where the public visit the premises - unless by appointment - must make ‘reasonable adjustments’ where physical characteristics of the premises may otherwise prevent access by disabled people.
The adjustments need only be reasonable and are considered in the light of the benefits provided weighed against the costs. You should remember that ‘disabled’ includes all disabilities and not just wheelchair users. If you cannot comply with the Act because of a legitimate reason, such as where you are not permitted to make changes, whether structural or cosmetic due to the terms of your lease, or the premises are in a listed building or a conservation area, you will have a defence against any action.
Liability for asbestos. New regulations came into force at the end of 2004 which require the carrying out of an asbestos risk assessment. If asbestos is found on the premises you will either be obliged to manage and contain it or, if the asbestos is deteriorating, remove it altogether.
Non-compliance is a criminal offence, punishable by a fine and/or imprisonment. A full survey, before taking a lease, should reveal the presence of any asbestos and other defects.
COMPENSATION FOR IMPROVEMENTS
Can you claim payment or compensation from the landlord for your expensive fit-out works at the end of the lease?
Statute does allow for the payment of compensation, but it is nearly always excluded from most leases.
You should also bear in mind that at the end of your lease your fixtures and fittings that are permanently attached to the premises are deemed to form part of them and belong to the landlord, unless provided otherwise by your lease.
If the landlord does not agree to their removal they must be left behind. Therefore, when taking a new lease you should ensure that you have the option to remove your fit-out works whenever you leave, regardless of whether the landlord asks you to do so.
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