Commercial Property ‐ FAQ
- Exercising break options
- How long will a property transaction take?
- How much will the transaction cost?
- Leases: Cutting through the Jargon
- What are the property searches?
- What does commercial property include?
Exercising break options
Many Leases contain break options within them by which either the Landlord or the Tenant can bring the Lease to an end earlier than at the end of the term.
Break clauses can be for the benefit of Landlords or the Tenants although most tend to be for the benefit of the Tenant.
How do I exercise the break option?
The first thing is to check your Lease or arrange for your Solicitor to do so. Some break clauses are personal to the original Tenant and therefore if the Lease has been assigned to you then you might not have the ability to break the Lease.
Many Leases only allow the break to be exercised on a specific date and nearly all require a specified period of notice to be served prior to the break date. Time will be of the essence and therefore the timescales need to be strictly complied with. Always leave yourself plenty of time to serve your break notice rather than leaving it to the last minute and then potentially missing your break date.
Are there any conditions to the break?
Break clauses often have conditions to them. It is usual for there to be a requirement that all rent is paid up to date at the time that the notice is served and when that notice expires. Tenants should be careful to check their Lease as to whether there also needs to be compliance with other covenants. If so, ensure that those covenants have been complied with before exercising the break. Some break clauses may require reasonable or substantial compliance with those covenants. In which case minor breaches should not prevent you from breaking the Lease.
What are the requirements for serving the break notice?
Once again, check your Lease as to whether there are any specific requirements as to the service of the notice including on whom it needs to be served and the method of delivery. Are you sure of the correct address for the recipient? Do you need to consider postage times? To be more certain of safe service of the Notice, arrange for it to be hand delivered.
This guide is merely a summary of the issues that might relate to a break clause and we would always advise that you obtain legal advice as early as possible.
How long will a property transaction take?
This will depend upon the type, size and complexity of the transaction. More importantly it will depend on how quickly both parties want to get the matter finalised. We will be able to estimate such timescales at the beginning of a transaction and will always make every effort to complete the transaction.
How much will the transaction cost?
From the outset we discuss with you the fees we expect to charge which will depend on the type of transaction. We offer a competitive service and will give you details of hourly rates and all expected legal costs, including search fees, Stamp Duty Land Tax and Land Registry fees. Where you are buying, selling or leasing a proprty, we will give you an estimate of our fees in advance and will do our upmost to work to that estimate, not beyond it.
Leases: Cutting through the Jargon
Leases can be lengthy documents with lots of expressions and jargon which will be new to many people, making the documents difficult to understand. However, a little bit of information will help you cut through the jargon and make things much clearer:
- Who is the Landlord? - This is the person who owns the property and is letting it to the other party. They are sometimes called the Lessor.
- Who is the Tenant? - The person to whom the Lease is being granted. They are sometimes called the Lessee.
- Rent - This is the amount that the Landlord charges the Tenant on an annual basis for using the premises. This is usually paid either quarterly or monthly.
- Term - This is the length of time the Lease is granted to the Tenant.
- Rent Review - The way in which the rent can be increased during the Term. How often the rent is reviewed is dependent upon negotiations between the parties but is often either 3 or 5 years, depending upon the length of the Term. Commercial Leases usually have a rent review based upon the open market rent whereby the rent is increased to the amount at which the Landlord could let the premises on that date. Some Leases are reviewed in accordance with the Retail Price Index so that rent is increased in accordance with inflation.
- Repair Obligations - The Tenant is usually responsible for repairing the premises throughout the duration of the Term. Some Leases have a full repairing obligation (sometimes called a Full Repairing and Insuring Lease (FRI)). Such Leases require the Tenant to keep the premises to a very high standard of condition. It is important to check whether the repair obligation includes structural parts of the property. An internal repairing Lease requires the Tenant to repair the internal surfaces of the premises such as ceilings, plasterwork and floor coverings. In these circumstances, the Landlord is usually responsible for maintaining the structural parts but may charge the Tenant part of the cost of such maintenance through a service charge.
- Tenants Covenants - These are the restrictions and obligations upon the Tenant which are imposed by the Landlord. These will form the majority of the Lease.
- Landlords Covenants - These are the obligations that the Landlord owes to the Tenant. This will include the covenant for quiet enjoyment which requires the Landlord to leave the Tenant to get on with their business. The Landlord usually covenants to insure the building but often has very few other covenants.
- Break Clause - A clause within the Lease which enables one party to bring the Lease to an end early. The clauses are specific as to whether the Landlord or the Tenant is the person that can exercise them and is very much a matter of negotiation.
- Rent Free Period - With a new Lease, a Tenant may negotiate with the Landlord for a Rent Free Period whereby they do not have to pay the rent for a certain number of months at the beginning of the Term.
- Landlord & Tenant Act - The Landlord and Tenant Act 1954 states that Tenants of business premises have a right to automatically renew their Lease at the end of the Term unless the Landlord can raise specific grounds of refusal. The Landlord and Tenant Act can be excluded from the Lease if agreed in advance between the parties. The Landlord then has to serve a notice on the Tenant confirming that the Act and its protection has been excluded and the Tenant then makes a Declaration confirming that he accepts this.
If you need advice or information regarding terms within a Lease then please contact a member of the Fosters Commercial Property Team.
What are the property searches?
When purchasing or leasing a property, we would recommend that you carry out the property searches as early as possible and we can do this on your behalf. The searches are made up of the following:
Local Authority Search
This is a set of enquiries raised with the Local Authority covering a wide range of subjects. The search will include the following information:
- Details of planning permissions granted in respect of the property together with Building Regulation Consents, Listed Building Consents and Conservation Area Consents. Furthermore, if enforcement action has been taken by the Local Authority in respect of planning or building Regulation matters, details of this will be set out.
- Whether the road adjacent to the property is maintained at public expense as a highway or whether it is subject to an adoption agreement.
- Whether the property is required for public purposes or is to be acquired for roadworks.
- Whether there are any drainage agreements for consents which affect the property.
- Whether there are any nearby road schemes within 200 metres of the property which will include new trunk roads or road improvements.
- Information as to new traffic schemes such as stopping up orders, diversions, waiting or loading restrictions, one way systems, traffic calming or pedestrianisation.
- Whether there are any outstanding notices in respect of building works, environmental matters, health and safety, housing, highways or public health.
- Whether a Compulsory Purchase Order has been served in respect of the land.
- Whether the land is the subject of a Contaminated Land Notice or is registered under the Environmental Protection Act.
- Optional questions which include whether the property is affected by public rights of way.
Drainage and Water Search
This search identifies and checks the details of the water and drainage services at the property and confirms whether the property is connected to the public water supply and drainage system. It also:
- shows the location of public water mains and sewers in the area;
- identifies the existence of any agreements or consents relating to the water services;
- provides information on the risk of internal sewer flooding which might result from overloaded public sewers nearby;
- provides an analysis of the risk of receiving low water pressure together with possible remedial measures;
- provides the location of nearby sewerage treatment works;
- provides information as to the basis upon which water services are charged to the property;
- provides an assessment of water quality.
These are a desktop study of any environmental risks which could affect the property. This then enables you to assess whether there are any risks which might change your decision as to whether to proceed with the property transaction. The information provided by such searches are as follows:
- A professional opinion by a firm of chartered surveyors on the level of environmental risks associated with the property and the likelihood of the property being described as contaminated under the terms of Part II A of the Environmental Protection Act 1990.
- An additional surveyor's report which suggests the next steps if such risks are identified.
- Details of past and present industrial use.
- The location of nearby landfill and waste management sites.
- Details of consents to discharge that may have been granted in the locality.
- Confirmation as to whether the property is in or is close to a radon affected area.
- An indication from the British Geological Survey regarding the risk of natural ground stability and instability caused by mining.
- An assessment of flood risk including surface water, tidal flooding and information regarding flood defences.
Some properties are within a parish that retains the potential for the church to charge for the cost of repairing the church chancel. The Chancel Search will identify whether there is any potential liability within the parish for such repairs. One couple were made responsible for a claim of £230,000.00 in respect of the cost of repairing a nearby church. They fought the claim and unfortunately lost and incurred legal fees of some £250,000.00 as a result. Sadly, they had to sell their home to pay the costs. Unfortunately, such searches only confirm if the parish has a liability, not the property itself.
Land Registry Search
This checks whether a specific property register at the Land Registry has changed since the time the register was last viewed by way of office copy entries.
What does commercial property include?
All types of land and premises including offices, shops, hotels, residential/nursing homes, industrial and warehouse facilities. It can also include the acquisition and sale of development sites for both residential houses and flats and commercial premises i.e. shops and offices etc.