1 Negotiations and heads of terms
1.1 Negotiations over the lease must be approached in a constructive and collaborative manner.
1.2 The agreement as to the terms of the lease on a vacant possession letting must be recorded in written heads of terms, stating that it is ‘subject to contract’ and summarising, as a minimum, the position on each of the following aspects:
- the identity and extent of the premises (and requiring the landlord to arrange the provision of a land registry-compliant plan if the lease is registerable)
- any special rights to be granted, such as parking or telecom/data access
- the length of term and whether the Landlord and Tenant Act 1954 will apply or be excluded
- any options for renewal or break rights
- any requirements for a guarantor and/or rent deposit
- the amount of rent, frequency of payment and whether exclusive of business rates
- whether the landlord intends to charge VAT on the rent
- any rent-free period or other incentive
- any rent reviews including frequency and basis of review
- liability to pay service charge and/or insurance premiums
- rights to assign, sublet, charge or share the premises
- repairing obligations
- the initial permitted use and whether any changes of use will be allowed
- rights to make alterations and any particular reinstatement obligations
- any initial alterations or fit-out (if known) and
- any conditions of the letting, such as subject to surveys, board approvals or planning permission
1.3 At a lease renewal or extension, the heads of terms must comply with the above except for any terms that are stated to follow the tenant’s existing lease subject to reasonable modernisation.
1.4 Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests. The landlord, or its letting agent where relevant, will be responsible for ensuring that heads of terms complying with those provisions are in place before the initial draft lease is circulated.
2 Lease Negotiation
2.1 The premises
2.1.1 The identity and extent of the premises being let should be clearly defined, including which elements of the structure or fabric are included.
2.1.2 A lease plan should be supplied by the landlord for attaching to the lease if that is necessary or desirable for identifying the premises and in all cases where the duration of the lease will exceed seven years, where it should comply with the requirements for registration of the lease at the Land Registry.
2.1.3 The tenant should be granted all rights necessary for the intended use of the premises. This includes clear arrangements for any special rights such as parking or for electronic communication connections including, where necessary, the right to require the landlord to grant wayleaves for data cabling.
2.2 Length of term, renewal rights and break rights
2.2.1 The length of term should be clearly specified and any date when it is intended to start.
2.2.2 Any options to break should be clearly specified, including the dates (or range of dates) when a party can end the lease, the length of prior notice to be given and any pre-conditions for the break being effective. It should also state the method of serving notice.
The 1996 Order defines the requirements for the landlord and the tenant at the date of termination. It specifies the notice period for both parties.
2.2.3 Unless the parties have agreed stricter conditions in the heads of terms, a tenant’s break should be conditional only on the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers.
A dilapidations survey should be undertaken to ensure all tenant’s obligations have been met.
2.2.4 There is a general principle that any sub leases should be agreed through our committee structure. The exception to this are alienation clauses contained within the lease and should be explicit within the initial head of terms.
2.2.5 Leases should require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect. Repayment of service charges may be deferred until the service charge accounts are finalised.
3 Rent deposits and guarantees
3.1 Details of any rent deposit should include the amount (including where required any sum to cover VAT), the time it will be held, whether it will be security for only the rent or all the tenant’s obligations under the lease and the circumstances in which the deposit will be returned to the tenant with any accrued interest.
3.2 Rent deposit agreements should provide that landlords will hold rent deposit funds in bank accounts designated for holding only rent deposits and that any bank interest will accrue for the tenant.
3.3 Details of any guarantee should include whether it will cover only the rent or all the tenant’s obligations under the lease, the amount of any cap on the guarantor’s liability and the circumstances (if any) in which the guarantee will be released.
4 Rent and rent review
4.1 The initial rent, the frequency of payment and whether the landlord intends to charge VAT on the rent should all be clearly stated, together with details of any rent-free period or other incentive.
4.2 Where the landlord proposes that rent is to be subject to review, the tenant should be notified of the proposed frequency and the method or formula of review at the outset in order to obtain early professional advice as to the implications.
4.3 Rent review clauses should be clearly expressed. Definitions of market rent should not result in a ‘headline rent’ unless that has been expressly agreed by the parties, such as where that is agreed in return for a financial inducement. Provisions for indexed rent reviews should not contain obscure formulae designed to produce a greater increase than is proportionate to the increase in the index over the appropriate period or outside any agreed caps or collars.
4.4 Leases should allow either party to start the rent review process and should not impose time limits intended to prevent a review or set a new rent through inaction by either party.
5 Service charges, insurance costs and other outgoings
5.1 The landlord should indicate the range of main services, if any, and provide proper estimates of service charges and insurance payments. The landlord should also disclose the types of other outgoings (such as business rates) that the tenant will incur under the lease. Landlords should disclose known irregular events that would have a significant impact on the amount of future service charges.
5.2 The parties should have regard to the current edition of Service Charges in Commercial Property, RICS professional statement and, so far as practicable in the circumstances, service charge provisions in leases should be drafted in conformity with the core principles and mandatory provisions of that professional statement.
6 Assigning, subletting, charging and sharing
6.1 Leases should allow tenants to assign the whole of the premises with the landlord’s consent, which is not to be unreasonably withheld or delayed. Landlords may set out circumstances in which consent can be refused, such as where there are arrears of rents, service charges or insurance premiums that are not the subject of a legitimate dispute, or where the assignee has insufficient financial strength, but all such circumstances should be reasonable and appropriate.
6.2 Leases should also provide that, if in each case the landlord reasonably requires, the assigning tenant is to provide an authorised guarantee agreement (AGA), any existing guarantor is to guarantee that the assigning tenant complies with the AGA, and/or the assignee is to procure a new guarantor and/or rent deposit.
6.3 Leases should allow corporate tenants to share the premises with other companies while they are in the same corporate group and do not create a subletting. In appropriate cases, leases of retail units may allow the tenant to grant licences of areas for use by concessions, such as where retail brands can be given stalls in a large store.
6.4 Leases should allow tenants to sublet the whole of the premises and may allow subleases of parts, if appropriate without security of tenure, and in each case with the landlord’s consent, which is not to be unreasonably withheld or delayed and at rents not less than market rent. Subleases should be required to be on terms consistent with the tenant’s own lease.
7.1 Leases should contain tenant’s repairing obligations appropriate to the length of the term, the condition of the premises and the financial terms.
7.2 If the tenant’s repairing obligations are to be limited to the initial condition of the premises, a schedule of condition will normally be required and the parties should agree which party is responsible for the cost of obtaining it.
7.3 Where the premises are or will be newly built, a tenant taking on direct or indirect responsibility for repairs should be given suitable protection against inherent construction defects for an appropriate period.
8 Change of use, alterations and fit-out
8.1 Leases should give landlords control over alterations and changes of use that are no more restrictive than are necessary to protect the value of the premises and any adjoining or neighbouring premises of the landlord, and this may differ between different types of property.
8.2 Where the landlord intends to prohibit certain changes of use or the making of certain alterations, or to require a licence from the landlord before they can take place, the tenant should be notified at the outset in order to obtain early professional advice as to the implications. This does not apply to normal provisions against changing the use outside the existing use class under planning law.
8.3 In a lease of an entire building, a landlord should not normally prohibit, or require its consent to be obtained for, internal non-structural alterations that do not adversely affect the character, value, structural stability, statutory compliance or energy efficiency performance of the building, but landlords will require the tenant to carry out such works properly and without causing damage or nuisance and to give written details to the landlord.
8.4 In a lease of a unit in a multi-let building, a landlord may require that its consent for internal non-structural alterations is to be obtained and that such consent is not to be unreasonably withheld or delayed, and may prohibit any alterations that adversely affect the character, value, structural stability, statutory compliance or energy efficiency performance of the building or its building services.
8.5 Except where the heads of terms state that there will be a reinstatement specification or an obligation on tenants to remove alterations, a lease should allow the tenant to leave alterations in place unless it is reasonable for the landlord to require their removal.
8.6 The tenant should be notified at the earliest practicable time if the landlord intends to impose any obligations for an initial fit-out that might involve material cost or to restrict how the tenant can fit-out or use the premises. The heads of terms and the lease should set out any agreed minimum requirements and any capital contributions.
9 Insurance and damage
9.1 Where the landlord will insure the property, leases should provide that the policy will be on normal market terms, that full terrorism cover will be provided if it is available at reasonable rates of premium, and that the landlord will insure with reputable insurers and provide details of the insurance to the tenant on reasonable request.
9.2 Leases should state that rent suspension will apply if the premises or any landlord’s areas or services serving them are damaged by an insured risk or, other than where due to an act or default of the tenant, an uninsured risk. If the lease limits the period in which rent is to be suspended, either party should be allowed to terminate the lease if reinstatement of significant damage is not completed within that period.
9.3 Leases should state that if the whole or a substantial part of the premises or any landlord’s areas or services serving them are so damaged by an uninsured risk as not to be capable of normal use by the tenant, either party should be allowed to terminate the lease unless the landlord agrees to rebuild at its own cost.
9.4 Landlords should pass on to tenants the benefit of discounted premiums and should disclose to tenants whether the landlord benefits from insurance commissions.
10 Management and operational performance
10.1 Leases of parts of multi-let buildings should contain provisions, appropriate to the characteristics of the building that encourage cooperation between the parties to improve operational efficiencies in the building and to share available data.
10.2 Consideration should be given to including in the lease other ‘green’ provisions, see examples in the Better Building Partnership’s Green Lease Toolkit.
11 Energy Performance Certificates (EPCs)
11.1 Leases should state which party is responsible for obtaining any EPC that may be needed during the lease term.
11.2 Landlords should be required to act reasonably if they reserve the right to choose which EPC assessor the tenant may use.
12 Landlord’s title
12.1 The landlord should be responsible for obtaining any consent for the grant of the lease required from a superior landlord, mortgagee or other third party.