Commercial property leases; pitfalls for landlords to consider

The past decade or so has been as changeable a time as any for commercial property professionals, says Nick Cox.

We have revised our views on aspects of commercial leases, such as notices and break clauses, there are new codes of practice on dilapidations, commercial leases and service charges and now the abolition of forfeiture and peaceable re-entry is just round the corner. But with the cooling of the economic climate, and investment in property slowing, landlords have to be more careful about the whole process of negotiating and operating commercial leases. Nick flags up some of the pitfalls.

At the start

As well as personal guarantees where the tenant is a company or LLP, landlords should consider additional security for individuals. The best option may be a rent deposit (three or possibly six months), covered by a well-drafted deed that allows sums to be drawn down to cover defaults on rent and service charge. Ownership of the money secured needs to be established, as it may be clawed back by a liquidator or trustee in bankruptcy. There also needs to be a provision that requires the tenant to replenish any funds drawn down on.

During the lease

A landlord will want make sure that rent is paid on time. Where he doesn’t wish to forfeit, he will need to take other, creative steps to keep pressure on any recalcitrant tenant to establish whether the failure is a mere blip or sign of a more fundamental problem.

For now, at least, a landlord can still distrain for rent by sending in the bailiff, but at a time when vacant property is not at the top of the wish list, other options may be limited. Perhaps, if a guarantor is named, proceedings for a debt against the company and the guarantor might prove useful, or perhaps an interest invoice might be issued to prompt a disorganised tenant into payment.

At the end of the term

In a ‘cold climate’, tenants will probably be on stronger ground than for some years. Landlords may have to make concessions on renewals in terms of rent and perhaps repairs, but the starting point on renewal is the wording of the existing lease.

The market is a volatile thing, but the legal principles governing proper management of leasehold property remain similar. Landlords would be wise to take careful interest in existing tenants so as to maximises their return, and retain good tenants on terms that suit both parties.

Partner Nick Cox specialises in commercial contract disputes and has particular expertise in contentious landlord and tenant work. He is a member of the Property Litigation Association and an ADR Group-accredited mediator.

Contact nick.cox@willans.co.uk