Heads of Terms: Negotiating a commercial lease (Part 2/8)

In part one, we looked at who the tenant will be and why it is important to consider various important implications of taking the lease in your personal name, company, guarantees and deposits.

Read the full series:

1. What are they, and why are they important?
2. Negotiating a commercial lease 
3. Alienation and transferability of the lease
4. Rent-free periods and break clauses
5. Service charge and insurance provisions
6. The tenant's covenant to repair
7. Making alterations to the property
8. Final boilerplate provisions in a commercial lease
   
    

Negotiating a commercial lease

In this part of our Heads of Terms series, we will look at the Landlord & Tenant Act 1954 and its impact on a lease. 

The question to consider with the Act is, is the lease within the security of tenure provisions or out?

The 1954 Act was a piece of legislation the government at the time enacted to support tenants in post-world war Britain. Scrupulous landlords were signing leases with tenants on a short term basis, and due in no part to the sheer limitation of commercial property in the UK due to the bombing of industrial and commercial property, the tenants would have to leave after a short time, and the landlord would have a new tenant paying significantly more rent.

This situation was changed by the 1954 Act, which, amongst other things, provided that, should a tenant have a lease granted within the Act, then the tenant could at the end of the lease remain at the property subject to the landlord’s right to obtain possession by a Court Order on seven grounds, all contained within the Act itself. 

These grounds make it difficult for a landlord to remove a tenant. We are not here to give a full breakdown of the grounds but, for example, the grounds can be such examples:

• The tenant is consistently late with rent. This is a protection for a landlord that the tenant is a bad payer, and therefore the landlord shouldn’t have to endure a tenant who is inconsistent in paying rent. There is, however, an issue with this in that case law has suggested that if the tenant at the court date to decide on a new lease or not, is not in arrears, this ground cannot be relied upon, and it is not mandatory on a judge to grant possession.
  
   
• The landlord wants to develop the property. To use this argument and ground, the landlord cannot just say they want to develop. They need to have gone some way with that, such as obtaining planning permission.

These two examples of grounds can show how difficult it can be for a landlord to obtain possession. The landlord must also go through a Court process, serve notice on the tenant and pay the fees of going to court. This is not an ideal scenario.

The process of renewal also favours a tenant, allowing a tenant to effectively serve notice before the landlord has an opportunity to do so, confirming that, pursuant to the 1954 Act, they want a new lease and suggest their terms first. 

If the tenant doesn’t serve a notice, the landlord is able to do so, and a tenant, very important to remember, will inadvertently lose their right to a new lease if they fail to respond within strict time limits. Please remember this.

The 1954 Act is therefore important for a tenant to instruct the agent upon and state that the lease must be within the 1954 Act and its protection.

Landlords will sometimes not like the lease to be within the Act and reasons for that could include:

1. They want control, so that a tenant must leave or agree to a new lease at the end of the term.
   
    
2. They can control the rent. If the lease is renewable under the 1954 Act, then without agreement between the parties on renewal, a Court will set the rent. Why would a landlord want to put that in the hands of a Court?
   
    
3. They can re-take and do what they wish with the property at the end. The asset isn’t potentially indefinitely leased to a tenant under the original lease.

The security of tenure provided by the 1954 act is great for a tenant. The Act itself also provides for compensation if the tenant has to leave but doesn’t want to. 

When negotiating Heads of Terms, both landlords and tenants must understand the implications of a lease being within or outside the Act. 

For a lease to be outside, the tenant must make a declaration in front of an independent third party solicitor. Think carefully before what you agree is set in the Heads of Terms as your solicitor will then have to renegotiate either way, and it is likely to be disagreed or become an issue with the other side.

Contact our commercial property solicitors

SO Legal has commercial property solicitors based in London, Brighton and East Sussex, and we work with clients across the UK.