The relationship between a landlord and tenant can be complex, particularly if there are certain conditions that need to be fulfilled by the landlord before the lease is completed. Problems often arise at the beginning of a transaction if the parties involved do not properly understand what they have agreed to do.

What is a lease?

This is the contract that governs the relationship between the landlord and the tenant. It is entered into following exchange of what is called an Agreement for Lease. However, an Agreement for Lease is not always needed meaning the lease can be entered into as soon as it is agreed by the Landlord and Tenant.

What are covenants?

A covenant can simply be described as a promise to do something, for example, to keep the property in repair or to pay rent that is due.

I have received correspondence from the letting agents with the terms of my letting – what are “Heads of Terms”?

These are the terms which are usually issued by property agents, setting out exactly what both parties have agreed. Broadly speaking they are prepared by the landlord’s letting agents, normally a firm of professional surveyors, and set out a brief detail of the terms of the transaction proposed. Some tenants mistakenly believe the Heads of Terms are the actual contract.

Heads of Terms list (among other things):

• Details of the property,
• the parties to the lease,
• length of lease term,
• the initial rent, and
• who is responsible for buildings insurance and repair.

In some cases both parties have their own surveyor to negotiate terms. For the smaller business enterprise without their own surveyor it is important before they agree the terms that they understand what they are committing to.

An example of particular concern would be who has the liability for repairing the property. Very often what is proposed is a “full repair liability”. This means that the tenant is responsible for the repair of the whole of the building (including the roof, foundations and structural parts), irrespective of any defects in the building that already exist. This may not be appropriate in certain circumstances, for a short lease for example.

Does agreeing to the Heads of Terms proposed create a binding contract?

No – this only happens when both parties enter into a written agreement which is signed and dated, usually called an Agreement for Lease or the Lease itself.

Beware of incurring unnecessary expenditure before a binding contract is entered into. Until then the other party does not have to proceed with the lease.

The Heads of Terms say there are “condition precedents” - what does this mean?

This means there is things that have to be done before the lease can be completed.

This may relate to planning regulations, particularly where the property has been used for something different to its proposed use. For example, the permitted use under planning regulations for a retail shop is use class A1. If the property is to be leased as a licensed restaurant this falls within use class A3. A condition precedent in this example means the landlord has agreed to arrange for the planning approval to be changed (NB in such a scenario one would have to consider the requirements of licensing laws).

When the condition precedent has been achieved the lease can be completed

If I agree to the terms, what happens next?

Normally a draft a draft lease and paperwork is issued by the landlord’s solicitor to the tenant’s solicitor to reflect the Heads of Terms. The tenant’s solicitor will then check this to ensure that the documentation reflects what the tenant has agreed.

After paperwork has been issued, how long will it take to complete the lease?

The answer very much depends on how complicated the transaction is and, sometimes, the efficiency of the other party and their advisers.

If there are no pre-conditions, the negotiation and completion of a lease can take 2 – 4 weeks.

If the landlord has to, for example, satisfy a planning condition the process will take longer.

If my business venture does not work, what can I do?

Usually, your contractual promises will remain to be performed until the lease term comes to an end.

It may be possible to assign (transfer) your lease to a new tenant, but you will need the Landlord’s permission and you will normally be required to guarantee the new tenant (e.g. to pay rent and keep the property in good repair) so the landlord can still come back to you to comply with the tenant’s covenants.

Will any guarantees come with the building?

Not on an existing building which is more than 10 years old, unless the parties agree otherwise. In some cases if the building is a new construction the landlord may provide you with a form of defects insurance (you may have experienced this with your residential property if it is a new-build, being similar to NHBC cover), or you may receive collateral warranties (promises) from whoever designed the premises, such as the architect and builder.

Will the rent increase during the lease term?

It depends what the parties have agreed. Normally a rent review is due at the mid-point of the lease term, e.g. in the third year on a 6-year lease. The majority of leases provide for rent review payable on an upward-only basis which means the rent will never decrease.

Code of for leasing Business Premises

There is in fact a very useful code of practice that you may wish to read as a guide to leasing business premises (Link: www.leasingbusinesspremises.co.uk).