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Business legal MOT – Chapter 4 – Property business leases

Images by Gareth Jones

If you are a business owner who is able to work from home during the present crisis, perhaps with fewer distractions, this might be an ideal time to reflect on your business and how it could be improved to emerge from the crisis in a stronger state.

In a series of short blogs, Morecrofts partner Donal Bannon will touch upon the various aspects of any business that may require attention in order to reduce risk and strengthen a business going forward.

Chapter 4 – Property – reviewing business leases to avoid costly mistakes

The fourth blog in the series looks at business leases and the issues that business owners should be aware of. Given the difficulties some businesses may be suffering as a result of the current pandemic many will be considering whether they can exit from their current lease.

How can a Lease be terminated?

1.Through the effluxion of time the term of the lease may have come to an end and a business vacates before the end of the term of if holding over an expired lease then on giving 3 months’ notice in accordance with Section 27 Landlord and Tenant Act 1954. Specialist advice on this complex area of law should be sought.

2.The lease could be surrendered if the landlord agrees. The tenant cannot simply vacate and hand back the keys.

3. Forfeiture is a right to end a Lease by a Landlord. When exercised it operates to bring the Lease to an end earlier than it would naturally end. Usually the lease is forfeited because the tenant has breached a condition of the lease such as failure to pay the rent.

How much notice must be given?

Check the lease to see what period of notice must be given and when. Fixed duration leases cannot be ended early by the tenant unless the landlord agrees. If the lease is a Periodic tenancy then the length of Notice corresponds with period of the tenancy and the Notice must expire at the end of the period. For example, for a yearly tenancy starting on 29th September notice must expire on 28th September and for a weekly tenancy beginning on a Saturday, notice must expire on the Friday.

If notice is not given correctly then such notice is invalid.

Break Clause

A break clause is an option in a Lease for a fixed term which gives either or both Tenant and Landlord the option to determine before the expiry of the fixed term. For example, a 10 year Lease might contain an option to break after 5 years.

You need to check what period of notice must be given, when it must be given by and on whom and by what method the notice must be served. If these are not observed then the right to break will be lost.

Often, the right can only be exercised subject to conditions being fulfilled such as the payment of rent being up to date and the condition of the premises being in accordance with the lease.

A correct exercise of the break clause brings the Lease to an end at the expiry of the notice.

Assignment of the Lease

Instead of ending the lease it may be possible for your business to sell or assign the lease to another business. However such assignment will usually require the consent of the landlord. Often such consent cannot be unreasonably withheld by the landlord but the criteria often used by landlords include the suitability of the proposed new tenant. If consent is given then the exiting tenant, the new tenant and the landlord will be expected to enter into a License to Assign. Such License may provide that the original tenant remains liable on the terms of the original Lease but will have no liability if the Assignee performs all obligations under the lease for any obligations beyond the original term.

Beware Dilapidations!

  • Covenants to repair contained in the Lease vary greatly and may be one of the following which have different meanings and hence obligations:
    • “keep in repair” may mean put in repair
    • “yield up premises in good repair”
    • “substantial”
    • “habitable”
    • “tenantable”

They each refer to the condition of the Premises which the landlord expects the tenant to leave the premises in, at the end of the Lease.

A lease might require the removal of fixtures and making good any damage or simply to redecorate.

A Schedule of Condition with photographs ought to have been prepared and agreed at the beginning of the Lease to avoid disputes at the end of the Lease.

Options to repair are either to do the work or pay for the work to be done by the landlord’s contractors (often at much greater expense).

Summary

In summary, check the terms of the Lease for

  • A Break clause
  • Conditions of exercising break
  • Repairing obligations
  • Notice periods – time being of the essence

If you have any questions which arise from reading this blog, please get in touch with Donal at djb@morecrofts.co.uk

 

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