Commercial Property

Why landlords should instruct a solicitor to draft commercial leases

Why landlords should instruct a solicitor to draft commercial leases

As a landlord it can be tempting to draft and review your own lease.

This would save the need to instruct a solicitor.

The problem that often arises with DIY leases is an absence of clear enforceable terms.

Whilst there are many issues that can arise from DIY leases, two of the most apparent are security of tenure and rent review.

Security of Tenure – What is it and why is it important?

This right is automatically granted under the 1954 Landlord and Tenant Act to commercial
tenants with a lease term longer than six months who remain in actual occupation.

It allows the tenant to apply for a new lease on substantially the same terms as their current lease when it is coming to an end.

Landlords are obliged to provide this unless they can evidence
one of the limited grounds of refusal, for example an intention to develop.

It is a common misconception that a lease comes to an automatic end at the expiry of the term.

If a lease is not accurately drafted and contracted out it could leave a landlord in a
position of commercial difficulty.

What is needed to exclude a lease form 1954 LTA Act?

1. Contracting Out Clause

The lease must have a clause explicitly stating S24-28 of the 1954 Act are excluded, to prevent the tenant from their right of automatic renewal.

2. Notice of Exclusion

The prospective tenant must be provided with notice the lease will be
excluded from the 1954 Act

3. Declaration- This comes with two options

a) Statutory Declaration- Required where the above notice is served within 14 days of entering into the new lease.

This declaration is to confirm that the tenant is aware that the lease is contracted out and they are fully aware of the consequence of this.

The declaration must be sworn in front of an independent solicitor for a nominal £5 fee.

b) Simple Declaration- The same notice will be served on the tenant; however, this
will be more than 14 days before the lease is entered into.

The tenant does not need
to sign this form of declaration as the 14-day period provides the tenant with time to
consider the implication of the lease being contracted out.

The notice of exclusion and declarations must be served on the tenant in the required
prescribed form in order to be valid.

Rent Review- What is it and why is it important?

When leases do not provide for an increase/ review of the rent, Landlords must continue to charge the rent as the same rate stated in the lease for the entirety of the term.

This can result in the lease becoming under market value, affecting the commercial viability of the property.

This problem is particularly inherent with longer leases. Landlords need to be able to review the rent in line with the current commercial climate; the absence of such clause leaves landlords unable to do this.

There are various types of rent review (the most common
being open market) and we have highlighted three main types below:

Open Market

This is  based on the rental income that could be achieved in the open market if
the premises was let to a tenant on terms set out in a hypothetical lease with the same
terms as the current lease

Turnover Rent

This is calculated using a base rate percentage of the tenant’s gross turnover at the premises

Index Linked

This is simply based on the current rate of inflation.

Demonstrated above are just two of the many problems landlords may encounter when
drafting DIY leases.

Need help?

If you are a landlord looking to draft a lease from your premises, call 01772 799 600 to arrange a free initial discussion with one of our specialists to ensure your needs are reflected in your lease for a competitive rate.

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