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Landlords and tenants: finding the perfect lease arrangement

20 March 2009

Every landlord wants a reputable tenant who will be able to pay the rent and comply with lease obligations, including repairing covenants.

It can be a temptation to ask for security, such as rent deposits or guarantors, from tenants ‘just in case’. However, few tenants will be keen to give personal guarantees or tie up large sums of money in rent deposits. One thing no landlord wants is an empty property generating no income while he waits for the perfect tenant.

One way of allowing a landlord to manage his property more effectively is to grant short-term leases that exclude statutory rights of renewal. This approach makes it easier for a landlord to get rid of ‘bad’ tenants and reward ‘good’ ones by granting longer-term leases when the first lease comes to an end.

Some landlords are actively looking for longer-term leases and tenants, particularly if they need to support a bank loan secured against a property. As the supply of property exceeds demand, tenants are looking for more attractive deals. Landlords will be keen to keep the level of rent on new lettings as high as they reasonably can. This will make it easier to agree similar rents on rent review, without other tenants enquiring too closely into any inducements paid on comparable deals.

In order to maintain these ‘headline’ rents, landlords may offer capital contributions towards tenants’ fitting-out works or rent-free periods. However, tenants need to make sure that they take account of the tax implications of receiving the capital contribution or the rent-free period. A rent-free period will slightly reduce the amount of stamp duty land tax payable on the lease, but both forms of incentive could be taxable.

Landlords and tenants may also agree to ‘rent phasing’ or ‘stepped rents’. Here the tenant pays a lower amount of rent during the first couple of years of the lease in exchange for paying a slightly higher rent later on when, with luck, market conditions will have improved anyway.

With retail premises, it may be tempting at present to agree a turnover rent where the landlord receives a percentage of the turnover generated at the property. If tenants are considering such rents, they should ensure that the maximum amount payable is capped.

Landlords and tenants both need to consider the length of the term of the lease. Tenants are unlikely to want to commit too far ahead at the moment, as they do not know what the future holds. But a longer-term lease with options to break may be beneficial for both sides. The landlord can hope that, once in situ, the tenant will not to go to the expense of exercising his break right and relocating.

The tenant can exit the lease if necessary but has flexibility to remain in occupation if he wishes – which may be better than the prospect of having to leave the property on the expiry of a shorter-term lease.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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Emma Thompson LLB (Hons)
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Emma Thompson
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