If you are anything like me you might find reading and interpreting legal documents just a little bit painful. Chris and I are about to take on a nice block of five flats to rent for our SA business – very exciting but lots of admin involved before the practical stuff kicks in.
On Friday morning I spent two hours with our commercial lawyer to chew through five documents relating to our commercial lease. This is our first rodeo as it relates to commercial leasing so eagerness to learn kicked in and our solicitor happily turned the meeting into a mini masterclass by explaining the main leasing concepts and terms in language easy enough for my simple brain.
Armed with several pages of notes I thought there would be others in the community who would appreciate a summary of these learns. There are differences between commercial leases in Scotland v’s England so it’s good to know which ever side of the border you live on. This post may be dry stuff and not relevant for many at the moment but there are so many valuable nuggets here that could really help, so it may be worth filing for later reference.
In no particular order, here are some worthy points related to each document you might find helpful:
SOME BASIC CONCEPTS
- Commercial Leasing in Scotland is unregulated by legislation, it is only affected by 3 Acts. They are generally drafted by the landlord’s side and therefore have more freedom to skew their way. That’s why it’s necessary for the tenant to review with their solicitor clause by clause and ensure it is fair and equitable. It’s all about respective negotiation.
- In England there is more statutory protection for tenants in commercial leases.
THE TITLE
- The first thing to do is review the landlord’s title of the property to rent to ensure they do indeed own it and can let it. There is an obligation for the tenant to comply with the Landlord’s title so you need to check there are no unusual conditions that pass on to you as the tenant. If there are any planning conditions in the title i.e. affordable housing contributions etc you’ll want to make sure these have been paid.
- The lease must be registered with land registry to be binding- by doing this the tenant is protected if the landlord were to sell the building during the lease i.e. if so you could still continue leasing under the original conditions if sold to a new owner. Registering the lease also protects the landlord from financial breach by the tenant.
THE OFFER DOCUMENT
- The offer is the overall contract that dictates the structure of the other documents i.e. the lease itself, the deposit guarantee, any personal guarantees and licenses to occupy (we will be using a license to occupy for a few of the flats in the beginning so we can use them as they become available – essentially pay as we go until all five flats are available and the lease will properly commence).
THE DEPOSIT AGREEMENT
- Whatever deposit amount has been agreed will be held by the landlord’s solicitor for the duration and can only be withdrawn by the landlord if the tenant is in arrears.
- Interest earned on the deposit will be returned to the tenant at the end of the period.
- The deposit amount varies and is negotiable, as is the term for it to be held. It is reasonable to propose that after two to three of leasing with no arrears a deposit is returned. Otherwise it is cash tied up not working.
PERSONAL GUARANTEE
- It is common that a personal guarantee for rent liability is requested by the landlord, however it is typically either one or the other of deposit or PG.
- Essentially this means the tenants are personally liable for the rent during the lease period.
- It is reasonable to request that after a few years leasing with no arrears that the PG is removed.
LICENSE TO OCCUPY
- These documents are typically a lot of words to say that it is not a lease. These are for short term arrangements, have no statutory protection and can have immediate termination
THE LEASE
- The lease itself can either be FRI – Full repair and insuring where tenant is responsible for the entire fabric of the building, or an internal repairing and insuring lease only – self explanatory.
- You’ve all heard of the 4P’s of Marketing. Well for a document to be an actual lease it must contain what lawyers refer to as the 4P’s – Properties, Parties, Price and Period. Without any of these it will not comprise a lease.
- When you see a generic lease presented with the term “put and keep” – hopefully your lawyer will spot it but if not ask that it is taken out as it can be incredibly onerous in regards to excessive and unnecessary repairing standards.
- In a commercial lease there is no obligation for the landlord to do an inventory so the tenant must invest in this to protect themselves. The inventory equivalent in the commercial world is called a Schedule of Condition.
- In regards to insurance, the landlord will insure the building because they own it and the tenant is then required to reimburse.
- If the building were to burn down the lease is essentially put on ice and there is an obligation for the landlord to re-instate the building and put the tenant back in, at which point the lease would recommence. If this is not done within 3 years then both parties are clear to walk away.
If this has been helpful, great, I’d love to hear it. Likewise, if you have any other nuggets on leasing to add please do as the more learning the better.