So you’ve got a property that you want to let out to a business tenant, can you simply let out the property under a simple agreement and leave it at that?
You need to get the balance right between securing a tenant and negotiating beneficial terms to allow you the most flexibility.
Security of Tenure
Generally, tenants occupying property for the purposes of a business have an automatic right to renew their lease when it comes to an end. A lease will have to be granted for a specific time period. Upon expiration of the term of the lease, the tenant will have the right to remain in occupation of the property under the Landlord and Tenant Act 1954. This means that in the event that you want to reoccupy the property at the end of the term you may not be able to. This is known as the ‘security of tenure provisions’.
However, landlords can ask their prospective business tenants to ‘contract out of’ the security of tenure provisions. This will need to be negotiated at an early stage of agreeing a lease and drafting up a Business Property Heads of Term as a pre-cursor to the main Business Lease. Once a letting has been agreed in principal, a landlord letting a business property will draw up heads of terms as a basis for reaching agreement on the main terms of the letting. This allows landlords the flexibility they need to negotiate a new lease, reoccupy the property for their own use or renovate the property for another purpose.
Reinstatement of the property
Another point to consider at an early stage is to negotiate an obligation on the tenant to reinstate the property under certain circumstances. Being the owner of a commercial property, you need to understand that in order to secure a business tenant, the property may need to be adapted to the needs of that tenant/business – whether that be a coffee shop, book store or an office.
These alterations to the property will have to be agreed in a Licence for Business Property Alterations. The landlord must be aware of the specific terms of both this document and the Business Lease. A landlord can impose conditions on the business tenant to reinstate the property after a reasonable time period. Alternatively a landlord may also impose that any proposed works be carried out in a good and workmanlike manner and also be to the landlord’s reasonable satisfaction. This allows the landlord flexibility to control the use of the commercial property and also allow a variety of businesses to consider taking the property on board.
It is important to be aware of the reinstatement obligations within the lease to make sure that the Property is left in the standard and condition which is assumed.
Break clauses are very common in business tenancies. They offer flexibility for the tenant to consider its own specific business needs and embrace flexibility to upscale or downscale their own business at a specific time. Today’s market is incredibly competitive and some businesses need to review their prospects in the market. Therefore, negotiating a break clause may be in your interest to secure a good tenant and may be a compromise to an agreement to contract out of the statutory rights to renew the lease.
Securing the right tenant is important for a good relationship with your tenant. The key is to keep your commercial goals at the fore and know the specifics of your lease.
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