Why ‘Good Fences make Good Neighbours’

When dealing with Commercial properties, if the rules and boundaries of an agreement between landlord and tenant are clear, arguments tend to be avoided. The relationship, which started on a cordial and friendly basis, can continue that way.

Too often, we find a Commercial agreement has been made which is informal and this can result in problems further down the line.

To understand why it’s better to formalise an agreement using an experienced agency like Brown&Co, it’s important to understand the implications of some of the key ‘jargon’ used in drawing up formal Commercial property agreements.

Demise

The property or area to be covered by the arrangement. This can be an office, a warehouse, a shop, an industrial unit, a place for leisure, a space for a charity to use, a field, a car park, anything where a contract for the occupation of land is to be handed over.

Lease term

This is one of those times when the English language doesn’t help. The lease term is the duration the agreement/lease is to continue for. This can be a fixed period or can be variable based on, for example the frequency with which the rent is paid. This latter arrangement is often referred to as a periodic tenancy.

Terms or provisions

The provisions of the contract. Despite the re-use of the word ‘term,’ here it refers to the provisions contained within the agreement.

Statutory protection

If the tenant is going to occupy the premises for the purposes of a business or other purposes, then the tenancy may become protected under the Landlord and Tenant Act 1954 Part II as amended. I don’t propose to expand on this here as it is actually possible to take action to prevent this from arising but assuming the arrangement falls within the general gambit of this business requirement, the tenancy/lease may be protected.

Exclusive possession

The person you are entering into the agreement with has the key to the door/gate and can prevent anyone else from entering the premises without their agreement although this is usually modified by terms within the contract. This is one of the precursors to granting a lease or tenancy.

Rent review

If the lease term is to run over a period longer than say, three to five years, you may wish to consider including a provision to review the main rent. This is an area of potential complication which can be avoided by fixing the lease term to that duration. However, for a periodic tenancy, the onus is usually on the landlord to bring the arrangement to an end so a new tenancy and a new rent can be agreed.

If you have a rent review, there are some legal provisions you may need to consider but I would suggest obtaining some advice here. However, the rent review can be upwards only, and it can be to what is currently called market rent or you can use a formula such as the change in the retail prices index (RPI) since the rent was last changed.

We would suggest RPI not CPI (Consumer Price Index) for this because RPI generally includes property costs. CPI does not.

Break clause

These are usually for the tenant only but can be mutual, though that can be problematic to enforce for a landlord. If you are granting a longer term with a rent review, you may also wish to include a break for the tenant. This should not be dependent on any rent review, should require the tenant to give you notice, usually six months, but that’s down to discussion. It is usual that the tenant should not have any arrears and must give vacant possession on the break clause date. Other conditions can sometimes also be attached.

Alienation

This is a global term that usually refers to assignments, where the tenant essentially sells/transfers his lease to a third party. We would usually recommend that these are of the whole premises only and are subject to the landlord’s consent but this can be varied by discussion.

Insurance

Who is to insure the building? We regularly encounter instances of where either party is responsible but we also regularly encounter instances where no-one is responsible. Ask yourself, who should have the insurance money? Who needs to be responsible for rebuilding or repairing the building if it is damaged? We would normally advise the landlord to insure but include a provision in the arrangement to allow the landlord to recover the premium from the tenant. The landlord will then get the insurance proceeds but will need to commit to spending the money on repairing or rebuilding the building.

Costs

It is usual for the landlord to seek to recover several costs that he/she may incur as a result of the tenant’s actions:

• When the tenant seeks landlord’s consent for something.
• When the tenant is in breach of the provisions of the agreement and the landlord wishes to enforce compliance.
• There are statutory processes that can be followed if the tenant has committed a serious breach and the landlord requires the lease to be forfeited (brought to a permanent end.
• If the tenant has not maintained the building to the required standard such that the value of the building the landlord is getting back has a lower value. This can prompt a thing called a Schedule of Dilapidations and it is usual for the landlord to be able recover its costs should this happen.

The point of this is to try to show why informal agreements are not always a good idea. You need a formal document because nothing ever stays the same.

Circumstances change, friends and family members fall out and suddenly there is an informal arrangement in the way of both sides moving forwards.

A formal agreement sets out the terms of occupation and is clear; hence the heading, “Good fences make good neighbours.”

You can contact Mike Storey, Head of Professional Services, Brown&Co’s St Neots office, on 01480 479071.