Commercial property law covers the legal aspects of owning, leasing, buying, selling and developing commercial land or buildings. It is a large and complex area of law involving substantial sums of money and onerous liabilities. For this reason, commercial property disputes are common.
To help understand what is commercial property law, let us take a look at some of the different aspects of this law, how disagreements can arise and the way in which they can be managed for minimum disruption.
Commercial Property Law
For many businesses, leasing or buying commercial property is the largest investment they will make and the crucial base for all of their operations. Ensuring that you have the right to use the property in the way that you want and for the length of time that you need is crucial.
Commercial property lawyers work to ensure that those who are dealing with commercial property have a solid legal foundation for their transaction and that their position is protected as far as possible from liability.
Leasing Commercial Property
Leasing commercial property is complex and onerous. It is important that commercial tenants fully understand the extent of the obligations they will be taking on when they sign a commercial lease. Issues and pitfalls to be aware of include:
Security of Tenure
If a commercial tenant has the security of tenure under the Landlord and Tenants Act 1954, they have the right to renew the lease at the end of the term. The landlord will only have limited rights to refuse this, for example, if they want to redevelop the property or move into it themselves.
A lease can be granted without security of tenure. It would need to clearly state that the terms of the Landlord and Tenant Act will not apply. There is a required process for opting out of the security of tenure and it is important for landlords that this is followed correctly or the clause may not be enforceable. It includes serving a notice to the tenant warning them that security of tenure is excluded and obtaining a declaration from the tenant that they agree.
Landlords often prefer to opt out of the security of tenure. This gives them the option of regaining the property at the end of the term of the lease if they wish.
Repairing Obligations
A commercial lease will usually require the tenant to keep the property insured and in good repair and condition. Referred to as a full repairing and insuring lease, this puts a heavy burden on the tenant to deal with all repairs and maintenance issues.
The tenant must be fully aware of the obligations they will be taking on before the lease is signed. It is essential that a schedule of conditions is prepared beforehand by an expert commercial property surveyor and that the tenant is only required to restore the property to this condition. Without this, it would be open to the landlord to require the tenant to repair problems that were already an issue before the date of the lease. This could be crippling to a business if, for example, the landlord insisted that the roof be replaced.
A commercial property solicitor will ensure that the tenant understands the extent of their liabilities and how much of the property, if it is shared, is their responsibility. They will also make sure that robust clauses are included in the lease in respect of the current condition of the property so that the tenant is not required to carry out repairs in respect of pre-existing problems.
Break Clauses
Unlike residential leases, there is not usually any scope for a commercial tenant to simply give notice and walk away from a tenancy. Once the lease has been signed, they will be liable for the rent until the end of the term.
One option that can give both tenant and landlord the chance to end a tenancy is a break clause. This means that at a specified point during the tenancy, either party can give notice.
A break clause must be carefully drafted to ensure that it is not ambiguous or misunderstandings and disagreements could arise.
A break clause can be advantageous to a tenant who may not want to risk taking on a long lease without the chance of escaping from it. For this reason, a landlord may charge more when a break clause is included.
Rent Deposits and Guarantors
A commercial tenant will often be asked by the landlord to provide a rent deposit before taking over a tenancy. This is often three or six months’ rent. The landlord should hold this in a separate account. It can be used if there is a breach of the lease that causes a loss to the landlord, such as failure to pay rent or damage to the premises.
A landlord can also ask the tenant to provide a guarantor. This is an individual or company that will personally guarantee payment of the rent and adherence to the terms of the lease. If there is a breach, the landlord would then be entitled to enforce any rent arrears or losses against the guarantor.
It is important that guarantee clauses are carefully drafted or they could be held to be unfair and the courts will not enforce them.
Those providing a guarantee to a commercial tenant should take independent legal advice before signing as the obligations can be substantial.
Permitted Use
A commercial lease will set out the permitted use of the premises. It is important for the tenant that this is drafted as widely as possible to give them scope in the future should they wish to expand their operations at the property.
It is crucial to check that any proposed use is also acceptable to the local authority. The Town and Country Planning (Use Classes) Order 1987 gives several classes of use and commercial premises will fall under one of these. By way of example, Class E covers many shops and retail establishments, food and drink premises and sports and recreation premises.
If you were to take on a property without the right class of use in place, you would need to apply to have this changed. This can be a lengthy procedure and there are no guarantees that your request would be granted.
Restrictive Covenants
A commercial lease will contain a range of restrictive covenants preventing the landlord or tenant from taking certain actions. This can benefit the tenant in some situations. By way of example, the landlord could agree to a restrictive covenant that they will not rent nearby premises to businesses that would be in direct competition with the tenant.
The tenant could be required to covenant issues such as not to permit anything at the property that could damage it, not to store flammable items and not to allow anything that could cause a nuisance.
Service Charges
The tenant will be required to pay the landlord service charges, often each month. This payment covers the landlord’s costs in respect of issues such as maintaining common parts in a shared building, providing services and insuring the building if the tenant is only renting part of it.
Service charges can be a contentious issue. If they are not capped, it is open to the landlord to increase these as they wish. Wherever possible, it is recommended that a tenant negotiate a cap to potential service charges in the lease.
Assignment
If a commercial tenant no longer wants to rent premises, the lease may allow them to assign it to someone else. This will allow them to leave without having to keep making the rent payments until the end of the term of the lease.
The lease will set out the landlord’s requirements for dealing with an assignment. They are likely to want to approve the potential new tenant before agreeing to the assignment.
If the landlord approves, the new tenant will take on the lease and be liable for making the rent and other payments. However, the original tenant can still be liable if the new tenant fails to pay.
Rent Review
The lease will specify how often the rent will be reviewed. It may also set out how a new rent will be calculated. It is often a matter of dispute between a landlord and a tenant.
Both parties can ask a chartered surveyor to provide a market value of the rent, which can be used as the basis for negotiations. If an agreement cannot be reached, the lease will usually state how the matter is to be dealt with.
Where necessary, the issue can be decided at arbitration.
Purchasing, Managing, Selling and Developing Commercial Property
The high value of the commercial property and the extensive liabilities involved mean that it is crucial to have expert legal advice when buying, selling or managing premises.
When a commercial property is purchased, it is important to ensure that no conditions exist that will prevent it from being used in the way that the landlord wants and that the necessary planning consents and easements exist.
Where it is hoped to develop a site, the buyer needs to be sure that they have the rights that they need, such as access and that there is nothing in the legal title prohibiting their plans.
Commercial Property Disputes
Due to the complex nature of the commercial property, the large sums of money involved and the onerous responsibilities in managing and maintaining premises, disputes are common.
The law involved can be complicated and if not promptly and effectively addressed, disputes can quickly escalate.
While a dispute is ongoing, it can be very damaging, particularly for a tenant who may face financial difficulties if forced to pay large sums of money that they were not expecting.
Some of the main areas of dispute include:
- Dilapidation claims, where a landlord is claiming large sums of money, often at the end of the term of the lease, for repairs it alleges should be made
- Lease renewal, where an agreement cannot be reached over the terms of the new lease
- Rent arrears, if the tenant disputes these because of something the landlord has done or failed to do
- Service charges, where the tenant disputes the amount the landlord is charging
- Breach of covenant and forfeiture, if the landlord holds that the tenant has breached the terms of the lease and is seeking to forfeit the lease, ending the tenancy and evicting the tenant
- Insolvency, if the tenant’s business is no longer viable
- Other lease disputes, a very wide category can include interpretation of lease clauses, breach of restrictive covenants or issues surrounding break clauses, repairs and assignment.
If you are involved in a commercial property dispute, you are strongly advised to speak to a legal expert straight away.
At Witans Solicitors, our commercial property dispute solicitors have extensive experience in resolving disagreements for both commercial tenants and commercial landlords. We are often able to resolve these promptly and without the need for protracted legal proceedings.
Where a dispute is allowed to become entrenched, it can become both expensive and disruptive. By dealing with the matter effectively as soon as it arises, you stand the best chance of avoiding lengthy discussions and potential court action.
For more information on our services, see our commercial property disputes page.
Contact Our Commercial Property Dispute Solicitors
If you would like to speak to one of our commercial property dispute lawyers, email us at iinfo@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss the options available.
