If you’re one of the many that have ever considered running your own business and working for yourself, you may – depending on the nature of your business – need commercial premises. A commercial premise is a place from where you run your business, and is the opposite of a residential property, although if you work from home (such as some tutors) then the lines can be blurred!
Commercial premises are usually leased initially, although if your business becomes big enough you may wish to buy the freehold or a permanent location. But the assumption is you move from considering leasehold to considering freehold. For many businesses the latter step is one they never make because the outlay to buying a permanent property is too large. But whether you are leasing or buying a commercial property, there is enough jargon to befuddle you at the outset. Fortunately, here is a guide to help you get to grips with the terms.
What is “Alienation”?
Alienation is the legal transfer of title of ownership to another party.
What happens with “Assignment” of a lease?
Assignment of a lease is where the tenant transfers/sells its interest in the property for the unexpired term of the lease to an assignee.
What is an “Authorised Guarantee”?
An agreement an outgoing tenant enters into with the landlord when it assigns its lease to a new tenant. Under the agreement, the outgoing tenant guarantees the performance of the covenants by the new tenant. The outgoing tenant therefore becomes the guarantor for the new tenant.
What are Business Rates and who collects them?
Business rates are a business tax for occupiers of non-domestic property, collected and managed by the local council.
What is a “Break Clause”? (If you are a football fan, chances are you’ll already know this!)
A break clause (or a ‘break option’ or ‘option to determine’) is a clause in a lease which provides the landlord or tenant with a right to terminate the lease before its contractual expiry date, if certain criteria are met.
What is the “Break Notice”?
A break notice is the formal notification that one party wishes to exercise its right to terminate the lease in accordance with a break clause. Notices must be drafted with care, taking into account compliance with any pre-conditions, to ensure the right is successfully exercised.
What does it mean to “Contract Out” and why does it happen?
The parties to a lease may, by agreement, contract out of the Landlord & Tenant Act 1954 with the main consequence being to remove the tenant’s rights of renewal, and eligibility for compensation in certain circumstances (e.g. landlord’s redevelopment ).
What are “Covenants”?
Covenants in a lease refer to the obligations imposed on each party by the various clauses.
What are “Dilapidations”?
Dilapidations are the potential breaches of a tenant’s lease covenants in respect of repair, reinstatement of alterations, and redecoration. These can be raised by a landlord during the term of the lease or at lease expiry.
What is an “Estate Charge” and who levies it?
Part of the tenant’s service charge liability relating to the maintenance of the estate on which a commercial property is situated. The landlord normally imposes it on the tenant – think of it as a service charge for commercial properties.
What is meant by “Exceptions and Reservations”?
These are areas that would otherwise form part of the property but are not included in the lease.
What is “Forfeiture” and who has the right to it?
When a business tenant is in rent arrears or in serious breach of the lease terms, then the commercial landlord will in most cases have the right to forfeit – the right to summarily end the tenancy. The landlord must, however, comply with relevant legislation when exercising this right.
Full Repairing and Insuring (FRI) – who is responsible?
FRI is a term used to describe a lease where the tenant is responsible for all repairs and for insuring. The term also applies to the liability for payment of these costs. FRI leases can therefore include terms where the landlord pays for external repairs and insurance and recovers the cost from the tenant usually via a service charge.
What is meant by “Gross Income”?
This is one of the terms any business must acquaint themselves with. This is the total current income receivable from a property investment before allowing for any deductions.
What is “Gross Internal Area”?
Gross internal area refers to the total area within the perimeter walls of a property and makes no allowance for the space occupied by staircases, walls, etc. This measurement is the standard measurement given for industrial property. It gives you a rough idea of the space available for the running of your business, but if there are prominent features like large walls or spiral staircases, then these will eat into the area.
What does “Guarantee” mean?
An agreement whereby a third party is liable to pay the tenant’s debts, or carry out their duties, if the tenant fails to do so. The person that gives the guarantee is the tenant’s guarantor.
Who is the Head or Superior Landlord?
The person who is landlord to the tenant’s landlord (see freehold).
What are Heads of Terms and why are they necessary?
Heads of terms agreements record the requirements of both the transacting parties in the property transaction. It is designed for both parties to fully understand what they are subject to, and reduce any misunderstandings. The heads of terms form the basis of the eventual contract and will be passed to the parties’ solicitors tasked with drafting the contract or lease.
What is Indexation?
The practice of linking tenant payments under the lease to a published index, such as the Retail Price Index (RPI) or the Consumer Price Index (CPI). Mainly associated with service charge payments and rent reviews. This is to ensure that the payments rise in accordance with other societal rates. While fixed payment rates are sometimes used, landlords will more commonly use indexation.
What is an Internal Repairing Lease (IRL) and how is it different from an FRI?
Unlike a FRI lease, the landlord retains responsibility and financial liability for the cost of external repairs.
Who is the Landlord?
The person who grants the lease or who now has the right to enforce the terms of the lease. Be sure you are aware of how this is different from the head or superior landlord!
Why is a Lease necessary?
A legally binding contract between a landlord and a tenant which sets out the basis on which the tenant is permitted to occupy a property.
What is “Lease Surrender”?
An agreement whereby the parties bring a lease to an end other than by contractual expiry or use of a break option. This can often involve negotiation of a premium or rely on a mutually beneficial surrender. Lease surrender can occur at the early renewal of a lease, when one lease is surrendered and another one is drawn up.
What is a “Lessee”?
The legal term for ‘tenant’.
Who is the “Lessor”?
The lessor is the legal term for ‘landlord’.
What is the role of a Managing Agent?
A managing agent is the party instructed to oversee the property by the property owner or landlord. Managing agents have varying responsibilities, from maintenance and repair management to rent and service charge collection.
What are “Market Rent” and “Market Value”?
Market rent is the estimated amount for which a property could be leased. The market value is the estimated amount for which a property could be sold.
What is “Net Income”?
The income from a property investment after deductions for ground rent and non-recoverable expenditure.
What does “Net Internal Area” mean?
The ‘useable’ measured internal floor area of a building. It is the gross internal area minus unusable floor areas such as stairwells and walls.
How is “Net Yield” calculated?
Takes the assumed or actual costs associated with purchasing the property into account to produce a figure in respect of the relationship between the rental income and the total capital investment.
Open Market Rent
The most common basis of valuation at rent review (also known as open market rental value – OMRV). Defined as the rent at which the premises might reasonably be expected to let, in the open market, at the review date, on the terms of the hypothetical lease.
Overage – definitely not what you might think!
Overage (also known as ‘clawback’) concerns the right to receive future payments triggered by future events. Achieving planning permission for change of use or development, practical completion of a development, or the sale or lease of the completed development are potential events that could trigger an overage clause in a lease.
What is a “Premium”?
The price paid for a lease, in the open market, where one tenant assigns its interest to another, replacement tenant.
What does “Quiet Enjoyment” mean?
This is a term entitling the tenant to operate the premises without interference from the landlord.
The assessment required of non-domestic property to represent the rental value at a prescribed valuation date, subject to assumptions about repair on a full repairing and insuring basis.
What does “Reinstatement” refer to?
Refers to the tenant’s liability to remove its alterations at lease expiry, reinstating the property back to its condition at lease commencement.
The amount the tenant pays regularly to use the Property.
What is “Rent Review” and when does it occur?
A periodic review of rent during the term of a lease. Rent review clauses often require an assessment of market rent at the review date, but some incorporate other factors, such as the movement in the Retail Price Index.
What is the Rent Review Memorandum?
Records the outcome of the rent review process, whether the review is settled by agreement or arbitration / independent expert determination. It identifies the lease, the review provisions and both the original and current parties, recording the amount and effective date of any revised rent. It may either be annexed to the lease or retained with each party’s deed packet as a separate document.
What is the purpose of the Repair Notice?
Usually taking the form of an interim schedule of dilapidations, the intention of the notice is to highlight breaches of the lease to both the landlord and the tenant.
What is the “Schedule of Condition” for?
This is a record of the condition of property at the commencement of a lease. This is so that any damage arising later can be properly assessed.
Schedule of Dilapidations
This is a list of outstanding repair and maintenance items that have accrued under the terms of a tenant’s repair and maintenance obligations.
Security of Tenure
Unless the parties have ‘contracted out of the Landlord and Tenant Act 1954, tenants of commercial premises have the right to remain in occupation, and to a new tenancy on terms prescribed under the L&TA legislation. Also known as ‘lease security’.
Payable by a tenant for services provided in relation to the repair and maintenance of common parts.
Who imposes Stamp Duty Land Tax and who pays it?
A government fixed tax, chargeable on the execution of documents, relating to transactions such as leases, agreements for leases and conveyances. The duty is payable by the purchaser or lessee.
Where a tenant grants a new lease for the property, or part thereof, to an alternative occupier, for a period less than the residue of the tenant’s lease.
The tenant is the person who rents the property from the Landlord. Also referred to as ‘Lessee’ or even ‘leaseholder’.
What is the “Term”?
Also known as “Lease Period”, this is how long the property is to be rented for.
Transfer of a Going Concern
A mechanism used on the sale of a property investment where VAT is chargeable but not actually payable. It is only applicable where the asset is and remains income producing after the transaction.
What is “Vacant Possession”?
A term denoting the empty state of a property.
A legal term used in negotiations and correspondence meaning that anything said, or offers made cannot be subject to forced disclosure in the event of litigation or arbitration.