Our commercial property agreements and contracts FAQs are designed to help both tenants and landlords understand common terms and fundamental concepts you might see in your property paperwork. One of our commercial property solicitors’ most frequent and important tasks is drafting and reviewing agreements and contracts for the buying, selling and leasing of commercial properties, which is why it’s so important that you also understand what you’re entering into.
- Do you need a written occupancy agreement? What happens if you don’t have one?
- What is a commercial property contract? Why would you need one?
- Common terms (durations) used in leases
- Termination clauses in leases?
- Renewing a commercial lease: understanding the options
- What is a prescribed clauses lease?
- What is a schedule of condition?
- What do ‘overage provisions’ mean?
- What does ‘positive covenant’ mean in commercial property?
- What is a ‘deed of easement’?
- ‘Simple declaration’ and ‘Statutory declarations’: understanding the difference
Do you need a written occupancy agreement? What happens if you don’t have one?
A written lease is crucial as it records the full details of your occupancy with the landlord.
A lease should state the area being leased and the duration. There will also be provisions regarding the responsibilities of the landlord such as not unreasonably withhold consent to the tenant assigning or sub-leasing the property, the responsibilities of the tenant such as maintaining repairs, keeping the property in good condition, and to decorate the premise regularly. Other conditions will specify what type of damage constitutes an insured risk, the consequences of a breach of the lease, and the landlords right of re-entry if you breach any lease covenants or fail to pay rent.
By not having a written occupancy agreement, it’s easy to see how tenants can end up in a dispute with the landlord. It may be that you haven’t agreed who is responsible for the repairs in any common area of the property which you are leasing. Since there is no written occupancy agreement stating whether the responsibility falls on the landlord or on the tenant, it’s likely you’ll end up engaged in a dispute about the matter. This can distract you from your business and ruin your relationship with the landlord. To avoid this undesirable consequence, seek legal advice from our specialist commercial property solicitors when entering and negotiating a lease and ensure your lease covers all the relevant terms.
What is a commercial property contract? Why would you need one?
A commercial property contract is an agreement to purchase a commercial property. When you are buying a freehold commercial property, the contract will incorporate the ‘Standard Commercial Property Conditions’ (the ‘SCPCs’).
The SCPCs include the following matters:
- The date, which is to remain blank until the exchange of contracts.
- The details of the seller and buyer.
- The nature of the property, for example freehold or leasehold, and the boundaries.
- The title number of the property (or the root of title if it’s unregistered land).
- Specified incumbrances, such as matters which burden the land. It’s important to exclude all existing mortgages as you don’t want to acquire the liability for such mortgages after the purchase.
- The contract rate (if you are late in the monies being received on the day of completion).
- The purchase price.
- Deposit (usually a 10% deposit is required unless you are able to negotiate otherwise).
- Special conditions – these are varied and will cover matters such as whether the property is being purchased with chattels, with a person in occupation, and whether VAT is payable.
Our commercial property solicitors can help with drafting your commercial property contract and other legal documentation, and guide you through the legal process.
Common terms (durations) used in leases
A lease can be granted for as long as you and the landlord agree at the outset. At present, it’s rare for a lease to be granted for longer than a duration of 25 years. The average for a commercial lease is actually much shorter, at eight years.
If you do enter a lease for this duration, don’t forget that it is a registerable lease.
Termination clauses in leases?
As a lease is entered into for a fixed term, it isn’t necessary to include a termination clause. Instead, you may choose to/negotiate include a break clause. A break clause will allow you to terminate the lease before the fixed term ends.
For example, you may agree a lease for eight years. However, to maintain flexibility of moving before this eight year period (perhaps because your business may grow faster than expected and you may need a larger property) you may wish to include a break clause which is exercisable.
To find out more about break clauses, see our advice article Break Clauses In Commercial Property Leases.
Renewing a commercial lease: understanding the options
If a commercial lease is a business tenancy, the lease will usually be protected by security of tenure (unless the tenant and landlord have agreed to contract out and exclude security of tenure).
Security of tenure is the right to remain in occupation of the premise, even after the lease duration has expired.
To qualify as a business tenancy, you must fulfil all of the following:
- Be in exclusive possession of the premise, for a fixed term, and you must be making periodic payments (rental payment).
- Be in occupation of the premise.
- Be operating a business which is defined as a ‘trade, profession, employment’.
Provided the landlord doesn’t serve notice on you requiring you to leave, you can remain a tenant of that premise without renewing the lease.
However, if you have contracted out of the protection of security of tenure, you’ll need to renew the lease.
If you’re unsure whether you’ve contracted out of security of tenure, the lease will specify that security of tenure is excluded. This is because exclusion of security of tenure is only effective if the lease refers to the landlord’s warning notice stating that security of tenure doesn’t apply, and the tenant’s declaration that they understand this.
You can find more detailed information on excluding security of tenure in our advice article, Excluding security of tenure from a commercial lease under the Landlord and Tenant Act 1954.
What is a prescribed clauses lease?
Prescribed clause leases are compulsory registerable leases out of registered land, dated on or after 19 June 2006, and which contain the required ‘prescribed’ clauses to be registered at the Land Registry.
These prescribed clauses include:
- LR1: the date of the lease
- LR2: title number
- LR3: parties to the lease
- LR4: property
- LR5: certain prescribed statements
- LR6: terms of the lease
- LR7: premium including VAT
- LR8: prohibitions or restrictions on disposing the lease
- LR9: rights of acquisition
- LR10: restrictive covenant
- LR11: easements
- LR12: estate rent-charge burdening the property
- LR13: application for standard form of restriction
- LR14: declaration of trust.
A registrar of the Land Registry doesn’t have to enter the lease on the register if the wording in the prescribed clause is incorrect, and/or if the prohibitions or restrictions on disposal aren’t specified or correctly referred to.
What is a schedule of condition?
A schedule of condition usually records the condition of the premise at the time you enter the lease. The aim is to set a standard at which you must maintain (or repair) the property.
It’s common for a schedule of condition to include photographs to supplement the written description.
As with the lease, great care is needed when drafting the schedule of condition. It’s in the interest of the landlord and tenant to include as much accurate detail as possible. If there is uncertainty arising from the schedule of condition, it can prevent the tenant from maintaining the property to the standard the landlord required and can also increase the likelihood of a dispute.
When you’re preparing your schedule of condition, avoid the following:
- Having poor quality photographs which fail to show the defects already existing.
- Having insufficient photographs (usually a lack of close ups).
- Only having colour copies of the original digital photographs (and not the originals).
- Misplacing/losing the schedule of condition.
- Referring to a schedule of condition without preparing one.
Find out more about schedules of condition in our advice article, Is a tenant responsible for repairs and maintenance in a commercial lease?
What do ‘overage provisions’ mean?
An overage provision is a clause that can be include in a commercial property contract. Overage provisions allow the seller to receive additional payment if the buyer successfully obtains planning permission to develop the land they’ve purchased, change the use of the land, and even where there is sub-sale of the land in its present state where there is a rapidly rising market which allows the buyer to profit from the initial purchase of the land.
The amount of the overage (additional payment) is usually agreed to be a percentage of the increased value of the land, having taken advice from a surveyor or other suitably qualified person.
If this provision is included in a commercial property contract, there’s a number of questions a buyer will need to consider:
- How long does the overage provision last?
- What is the percentage share of the increased value of land from the planning permission? The percentage should be sufficient to justify the seller getting a portion of that value, for example, as high as around 30%.
Consideration for the seller will include:
- How will the seller obtain the payment? It may be that by the time the planning permission is obtained, the land is owned by a new party.
- The SDLT that may apply as a result of receiving this payment.
Consideration for both parties will be:
- When will the payment be triggered? For example, a payment trigger may be the granting of planning permission, or the implementation of the planning permission.
What does ‘positive covenant’ mean in commercial property?
In commercial property, a positive covenant is a promise to do something or to spend money in order to contribute towards a particular matter.
Common positive covenants that you may be required to give when buying a freehold commercial property could include a covenant to:
- Build and maintain a fence
- Contribute to the maintenance of a shared driveway/estate
- Repair a shared roof
Positive covenants are different to negative (or restrictive) covenants because positive covenants aren’t ‘attached to the land’. This means that whilst you’re automatically bound by negative covenants which are burdens such as ‘prohibition not to keep live animals on the land’, you actually need to actively agree to comply with positive covenants.
What is a ‘deed of easement’?
A deed of easement is a document which grants a third party the right to use land you own, in a particular specified manner.
Examples of rights which can be granted include:
- A right of way over your land so the third party can access their own land.
- A right of supply of water so water pipes can run through your land and channel water to the neighbouring land.
- A right to share or connect into a sewer line so the neighbouring land has a drainage system.
In addition to being created by an express grant in a deed, an easement can also arise by implication. An easement will only be implied if it’s necessary to imply it, or if there is a long period of use of the right such that an easement by prescription arises. An easement of prescription is a right acquired by long use or enjoyment.
‘Simple declaration’ and ‘Statutory declarations’: understanding the difference
Simple and statutory declarations are used to contract out of security of tenure.
The difference is that a simple declaration merely requires the landlord to give the tenant 14 days’ written notice before the lease commencement, that the security of tenure won’t apply to the lease. The tenant must respond with a statement that they understand this.
However, a statutory declaration is used when the parties want to enter a lease and there’s less than 14 days until the lease is commenced: meaning that the landlord can’t give 14 days’ notice. Instead, in response to the landlord’s written notice that security of tenure won’t apply, the tenant must make a written statement stating they understand, and this must be sign this in the presence of a solicitor.
In order for both declarations to be effective, the lease must state security of tenure is excluded and it must refer to both the landlord’s notice (or warning) that security of tenure doesn’t apply and the tenant’s declaration they understand this. Find out more about excluding security of tenure here.