FAQs

Residential tenants benefit from a range of statutory rights, many of which can apply to both residential and mixed use developments. It is important to consider these at the commencement of a mixed use development, in order to ascertain whether they will apply and, if so, whether any steps can be taken to avoid or minimise their future effect.

Whilst the changes to ground rent charges introduced in The Leasehold Reform (Ground Rent) Act 2022 may impact the market for ground rent disposals, the tenants’ right of first refusal under the Landlord and Tenant Act 1987 will be an important concern for developers on a mixed use or residential scheme in terms of its impact both on the setting up and ongoing management of the scheme.

Assuming that the development once developed and let will constitute “qualifying premises” for the purposes of the Landlord and Tenant Act 1987, the tenants’ right of first refusal will be triggered by a “relevant disposal”. The grant of a lease of a single flat is an exempt disposal, so will not trigger the tenants’ rights. There is no exemption for the grant of a commercial lease.

Whether or not the tenants’ right of first refusal will arise on any “relevant disposal” of the whole or part of a new development will depend on its timing. Where there is a split exchange and completion, the “disposal” for the purposes of the Landlord and Tenant Act 1987 will take place on exchange of contracts, rather than completion.

The Landlord and Tenant Act 1987 only applies to premises which contain two or more flats held by qualifying tenants. If a disposal takes place before the second flat has been sold or let, the disposal will not be caught by the Landlord and Tenant Act 1987. If the disposal occurs at a later stage in the development, the Landlord and Tenant Act 1987 will apply if both of the following conditions are satisfied:

• The building has reached a sufficient stage in its construction to be a “building” containing “flats”. This will be a matter of fact and whilst the term “building” is not defined in the Landlord and Tenant Act 1987, it is likely to require at least walls and a roof.
• The building, or relevant part, contains two or more flats held by qualifying tenants and the number of qualifying tenants exceeds 50% of the total number of flats contained in the premises.

A landlord’s ability to avoid the tenants’ right of first refusal under the Landlord and Tenant Act 1987 is very limited, especially in relation to existing developments. It is generally much easier to put in place avoidance at the commencement of a development, before there are premises which qualify for the purposes of the Landlord and Tenant Act 1987.

Structures that may be considered in relation to new developments include:

• Entering into an agreement to sell or a forward sale prior to or during the development. If a developer intends to exit from the development as soon as it has been constructed and let, it may prefer to line up its purchaser at an early stage. If an agreement for sale is entered into before there are qualifying premises, then it will not be caught by the Landlord and Tenant Act 1987. Completion of the sale will then be exempt, as it will be a disposal in pursuance of a contract, option or right of pre-emption binding on the landlord;

• Granting a headlease of whole or part, prior to commencement of the development. Inserting a headlease between the freehold and the flat leases will usually mean that the freeholder is no longer the landlord for the purposes of the Landlord and Tenant Act 1987, with the result that, following the grant of the headlease, it will be able to dispose of the whole or part of its interest without first offering it to the qualifying tenants. As the disposal for the purposes of the LTA 1987 takes place on exchange of contracts, a binding agreement for lease entered into with an identified tenant before the premises qualify for the purposes of the Landlord and Tenant Act 1987 may be completed without triggering the right of first refusal;

• Ensuring that the premises are held in a special purpose vehicle, so that the premises may be sold by way of a share sale.

• Including sufficient non-residential space within the premises. With a mixed use development, it may be possible for a landlord to alter the proportion of commercial premises so as to ensure that it exceeds 50% of the internal floor area.

• Limiting the number of qualifying tenants within the premises. This may be an expensive and difficult process but it may be possible for a landlord to alter the tenant profile within the premises, to reduce the number of qualifying tenants and thereby ensure that there are insufficient qualifying tenants for the premises to qualify under the Landlord and Tenant Act 1987.

Mixed use developments are schemes which comprise one or more buildings used for commercial, retail and/or industrial use where there is also an element of residential accommodation. Mixed use properties are not a new phenomenon; shops with living accommodation above have been a feature of high streets for centuries. However, modern times have seen an increase in more complex mixed use developments, many of which incorporate shops, restaurants and leisure facilities as well as residential flats.

Mixed use developments have obvious attractions for developers and investors; they combine the opportunity to extract capital value, by selling units on long leases, while at the same time retaining an income stream from the remainder.

There are several ways to structure the legal interests in a new mixed use development. The choice of structure depends largely on the developer’s future plans and whether it intends to retain either a reversionary interest in or management control of the development, or part of it, once it has been constructed and let. The developer must consider the potential impact of the statutory rights available to residential tenants, both on implementation of the scheme and in the future. Once a legal structure has been chosen and established it can be difficult to alter, so it is important to plan for the long term.

In terms of structure, a developer may choose to:

1. Retain the reversionary interest and manage the whole of the scheme/building. This structure is the most straightforward. Under this arrangement:

• The developer (as landlord) retains the exterior, structure and common parts of the building and covenants to repair them;
• The developer grants leases of each of the flats and commercial units directly out of the freehold;
• Any rents payable by the tenants are paid to the landlord. The level of rent payable will depend on the nature of the lease being granted. The Leasehold Reform (Ground Rent) Act 2022 restricts the ground rent chargeable on most new long residential leases to a peppercorn;
• The developer insures the building;
• Each of the tenants covenants to pay an appropriate proportion of the cost of the services (including insurance) provided by the landlord.

2. Dispose of both the reversionary interest and management of the scheme/building by granting a headlease of whole. This structure is suitable where the developer wishes to dispose of both the reversion and its management responsibilities to a third party, but still retain the freehold interest in the building. Under this arrangement:

• The developer grants a headlease of the whole of the building to a third party. Depending on the timing of this headlease, or the agreement to grant it, the developer may have to comply with the Landlord and Tenant Act 1987;
• The headlessee will either grant the leases of the units and flats to the tenants, or take the headlease subject to those leases that have already been put in place by the developer. This will depend on the timing of the headlease and whether the developer wishes to extract the capital value before handing over control of the building.
• Once the headlease has been put in place, the headlessee will become the landlord of the commercial and residential tenants, who will pay their rents to the headlessee. The Leasehold Reform (Ground Rent) Act 2022 restricts the ground rent chargeable on most new long residential leases to a peppercorn;
• The headlessee will take on responsibility for the exterior, structure and common parts and the management of the building, typically also insuring the building. The headlessee will provide the services to the tenants and the tenants will pay the appropriate proportion of the cost of the services to the headlessee.

3. Dispose of the reversionary interest in part of the scheme/building by granting a headlease of part. This structure is suitable where a developer wishes to hand over the management of part of the building, usually the residential areas, but retain the reversion to the remainder. Under this arrangement:

• The developer grants a headlease of part of the scheme/building to a third party. Depending on the timing of this headlease, or the agreement to grant it, the developer may have to comply with the Landlord and Tenant Act 1987;
• The developer will need to decide which part(s) of the scheme/building will be included in the headlease demise. In particular, it must decide which party will be responsible for the exterior and structure of the building and any common parts. Often it is preferable for the landlord of the residential tenants to have control of the structure and exterior, to ensure any long residential leases comply with the UK Finance Mortgage Lenders’ Handbook. The headlease will need to grant and reserve sufficient rights over any common parts to enable access by the commercial and residential tenants to the appropriate areas.
• The headlessee will either grant the leases of the units or flats within its demise to the tenants, or will take the headlease subject to those leases that have already been put in place by the developer. This will depend on the timing of the headlease and whether the developer wishes to extract the capital value before handing over control of the building.
• The service charge arrangements will depend on which party is providing the services. If a headlessee of the residential parts is responsible for maintaining the structure and exterior, for example, the landlord will be liable to pay to the headlessee the proportion of the cost attributable to the commercial units and seek reimbursement from the commercial tenant(s).

A land promotion agreement is really a type of joint venture agreement. Typically, a land promotion agreement will between a landowner and a planning promoter/developer and it would be used where a land promoter/developer has agreed to:

• Apply for planning permission for a development on a landowner’s property; and
• Market the property for sale on the open market once planning permission has been obtained.

Under a land promotion agreement the land promoter/developer funds the planning and marketing costs initially. If planning permission is obtained, the property is sold. The promoter’s costs are reimbursed to the promoter out of the gross sale receipts and the promoter receives a proportion of the net sale receipts (promoter’s share) i.e. a proportion of the gross sale proceeds generated by sale of the promotion land after various cost (for example planning) have been deducted and reimbursed.

If planning permission is not obtained by a certain date, the agreement automatically terminates and the promoter’s costs are not reimbursed. In this way, the landowner and the planning promoter/developer share the development risk i.e. planning and a sale not being achieved.

Promotion agreements are similar to option agreements. Many of the key issues which need to be considered in relation to promotion agreements are the same as those which need to be considered when dealing with option agreements, although there are fundamental differences between the two types of agreement. Under an option agreement, the landowner is usually obliged to sell the property to the developer once planning permission has been obtained. This gives rise to a conflict of interest between the landowner and the developer. The landowner wants to maximise the purchase price whereas the developer wants to minimise the purchase price. Under a land promotion agreement, once planning permission is obtained, the property is to be sold on the open market. The property will not be sold to the promoter. The landowner and promoter share the uplift in the value of the property with the benefit of planning permission. Therefore, there is no conflict of interest over the purchase price.

The key points which the parties to a promotion agreement will need to think about include:

1. Objectives. The promotion agreement should contain a list of objectives, which may amongst other objectives include obligations on the planning promoter/developer to:

• use all reasonable endeavours to obtain a satisfactory planning permission which maximises the open market value of the property in the quickest time reasonably possible;
• to procure that the property is allocated as a site suitable for development in the local authority’s development plan document;
• to maximise the development area of the property;
• to minimise so far as is commercially sensible the cost of infrastructure on the development area of the property;
• to minimise so far as is reasonably possible the financial obligations contained in any planning agreements;
• to market the property after obtaining planning permission with a view to maximising sale proceeds.

2. How long will the planning promoter/developer have to obtain a satisfactory planning permission. If a satisfactory planning permission is granted during this period how long will the land promoter/developer have to sell the land comprised within the satisfactory planning permission.

3. What are the parties obligations in respect of the planning process:

• Is the planning promoter/developer free to appoint whatever professional consultants it considers necessary or does the landowner need to consent to the appointments;
• Is the planning application an outline, detailed/full planning, outline consent followed by a reserved matters application or a hybrid;
• Does the landowner need to approve the planning application;
• Can the planning promoter withdraw, vary and/or submit further planning applications without the consent of the landowner;
• Are there any restrictions on actions the landowner can take i.e. not objecting to any planning application submitted by the planning promoter/developer.

4. What are the parties obligations in respect of sales process following the grant of planning permission, for example:

• Does the landowner need to approve the marketing strategy. An agreed sales/marketing agent should be required to draft a marketing strategy as soon as reasonably possible after planning permission has been granted.
• Can the planning promoter/developer vary the marketing strategy without the consent of the landowner.

5. What costs are deductible from the gross sale proceeds? The planning promoter/developer will want to ensure that the costs it has incurred are reimbursed prior to any distribution of sale proceeds and the promotion agreement should set out the order of priority in which a sale proceeds were distributed.

6. What is the planning promoter/developer’s split of the net sale proceeds?

An option to purchase (an option agreement) is similar to a conditional contract except that under an option agreement the developer is not usually obliged to purchase the land in the event of satisfactory planning permission being granted. This is the main difference between an option agreement and a conditional contract.

The most common type of option agreement seen in practice is a call option. A call option allows a developer or grantee of the option to call on a landowner to sell a property to it. The option may be exercisable at any time during the option period or only on the occurrence of certain events such as the obtaining of planning permission. However, the decision whether or not to exercise the option rests solely with the developer.

The various stages involved with a call option are:

• The landowner and developer enter into an option agreement. On payment of an option sum by the developer, the landowner agrees that the developer will, during an agreed period (the option period), have the right to exercise an option to buy the property;
• If the developer decides during the option period to buy the property it must serve an option notice on the landowner and pay a deposit. On service of the option notice within the option period, a binding contract for the sale and purchase of the property then arises on the terms set out in the option agreement;
• If the developer does not serve an option notice within the option period, the option will lapse and the landowner can dispose of the property free of the option.

There are a number of advantages to developers of taking a call option:

• The developer has complete discretion over whether or not to buy the property.
• The developer can secure the property from its competitors for the length of the option period.
• The developer can apply for planning permission knowing that it can buy the property if it is successful, but does not have to buy if planning permission is not granted or if it is granted subject to unacceptable conditions.
• Minimal outlay is required at the initial stages before the developer knows whether planning permission can be obtained.
• An option agreement is registrable, providing protection if the landowner sells the land to a third party.
• It is useful in site assembly where a number of plots are required from different landowners. The developer can ensure it has first secured all the plots before exercising the options.

Although options are usually proposed by developers for their own interests, there are certain advantages to landowners in granting an option:

• The landowner can demand an option sum in return for granting the option and tying up the land for the length of the option period. Sometimes the option sum is a significant amount and this is usually retained by the landowner whether or not the option is exercised;
• The landowner can take advantage of the developer’s experience and skill in obtaining planning permission at no cost to the landowner;
• Where the developer is seeking planning permission to develop a larger site that includes other land, the market value of the property may be considerably increased over and above any development value that the property may have on its own.

Whilst a call option is the most commonly used option agreement, other types of option do exist:

• Put Option. A put option enables a landowner to give notice requiring the developer to buy the property. The landowner may be able to give notice at any time during the option period or only when certain conditions precedent have been met. However, with this type of option, it is the landowner that decides whether or not to exercise the option;
• Put and call option. Put and call options (sometimes also called cross options) arise where a developer is given a call option and in return the developer grants the landowner a put option. The developer has the ability to exercise the call option during the option period and the landowner is able to require the developer to buy all or part of the property. Both options are likely to be exercisable only on certain conditions precedent being met.

A conditional contract is a binding contract for the sale and purchase of land which is subject to satisfaction of a condition precedent (for example, satisfactory planning permission must be obtained before the sale and purchase provisions can become operative). Developers often enter into contracts conditional on planning as a means of securing an interest in land but without an obligation to buy unless the planning condition in the contract is satisfied.

The contract will attempt to define the conditions precedent in detail so that it is clear when they have been met and when the contract will become unconditional. In the case of any dispute between the parties, the contract will usually provide for a dispute resolution procedure to be followed.

In brief, the stages involved with a conditional contract are:

• The landowner and developer enter into a binding contract for the sale and purchase of land which is conditional on certain defined conditions precedent being met (i.e. satisfactory planning permission being obtained, satisfactory ground survey results, satisfactory planning agreement or CIL obligtions);
• On the conditions being met, the agreement for the sale of the property by the landowner to the developer will become unconditional and the sale will proceed on the terms set out in the agreement;
• If the conditions are not met by a pre-agreed long-stop date, the agreement will terminate automatically or may be terminated by one or both of the parties.

If a developer wants the freedom to be able to exercise its discretion over whether or not the planning permission is satisfactory and acceptable to it, a call option will be the more appropriate structure for the transaction, rather than a contract conditional on planning permission being obtained.

From the landowner’s perspective, where a condition precedent is the grant of planning permission, the developer should be under various planning obligations, which may include:

• Submitting the draft planning application to the landowner for approval within a specified period of exchange of contracts;
• Using reasonable endeavours to obtain a satisfactory planning permission as soon as reasonably possible;
• To appeal against a refusal of the planning application (often where planning counsel advises that there is a greater than 60% chance of success);
• To keep the landowner updated as to progress of the planning application and any appeal;
• To provide the landowner with a copy of any decision relating to the planning application; not to implement any planning permission until after the date of completion of the sale to the developer.

A developer will also expect the condition contract to contain obligations on the part of the landowner, which may include obligations:

• To assist in obtaining a planning permission;
• To enter into any necessary planning agreements (i.e. S106 Agreement) required as a condition of granting planning permission;
• To procure that any mortgagee enters into any necessary planning agreements;
• To oppose any town and village green applications made in respect of the property and commence proceedings to challenge the registration of the property as a town and village green;
• Not to change the nature or character of the property;
• Not to dispose of the property (i.e. lease, charge, sell) without the consent of the developer.

Whilst the purchase of land under a conditional contract is conditional upon the satisfaction of specified conditions, the contract usually allows the developer to waive one or more of the conditions and proceed to completion of the purchase notwithstanding the conditions remain to be satisfied. There may be good commercial reasons why a developer may choose to complete without satisfying the contract conditions.

Dilapidations are items of disrepair that are covered by a repairing covenants contained in a lease. The term is often used to describe breaches of the tenant’s covenants relating to the physical state of the premises when the lease ends.

Breaches of the following types of lease covenants could give rise to liability in respect of dilapidations:

• Covenant to comply with statute.
• Covenant to repair
• Covenant to decorate
• Covenant to reinstate at the end of the term.

There are four remedies available to a landlord when dilapidations occur:

1. Damages. A landlord’s right to claim damages for breach of a repairing covenant derives from Section 1 of the Leasehold Property (Repairs) Act 1938 and Section 18(1) the Landlord and Tenant Act 1927. Due to various restrictions under the latter Act, seeking damages may not be the most preferred remedy by a landlord, but it is the only option once the lease has ended.
2. Forfeiture. This remedy is only available to a landlord if the lease provides an express right of re-entry, and a landlord must have served a Section 146 Notice on the tenant in a prescribed form and invite the tenant to serve a counter-notice when the Leasehold Property (Repairs) Act 1938 applies. Taking the step of serving Section 146 Notice would not preclude forfeiture by the landlord at a later date if the tenant fails to act to rectify the alleged breaches. However, a landlord must be aware of a waiver of the right to forfeit and the tenant’s right to apply for relief from forfeiture proceedings.
3. Self-help. When the lease permits, a landlord can enter the property and carry out repair works then recover the cost from the tenant as a debt (known as Jervis v Harris clauses following the decision in Jervis v Harris [1995] EWCA Civ 9). This remedy circumvents the restrictions associated with seeking damages as discussed above, and it is much more practical than the forfeiture option.
4. Specific performance. This remedy is an equitable one and, as a general rule, specific performance will only be granted where damages would not be an adequate remedy as compensation for the breaches committed by the tenant.

A key distinction as to how the damages are assessed in dilapidations claim for breach of a tenant’s repairing obligation depends on when the claim is brought:

1. If the claim is brought during the term of the lease, the starting point for calculating the measure of damages is the diminution in the value of the reversion of those premises.
2. If the claim is brought following expiry of the term, the measure of damages is the reasonable cost of doing the works plus loss of rent for the period until the works have been completed, where appropriate

Dilapidations is a complicated and often contested matter between the parties. Whether you are a tenant or a landlord, we recommend that dilapidations are managed carefully by a building surveyor with the assistance of a real estate lawyer.

Put simply, “good” for a tenant manifests itself as:

1. a good conditioned, regularly serviced and maintained building with high specification interiors, up to date eco-friendly and efficient systems
2. that is actively managed by the landlord (or it agent)
3. paying open market rent,
4. subject to watertight (tenant friendly) lease terms.

Lease terms that are deemed attractive to a tenant will look something a bit like this:-

1. A term of 5 years
2. A fixed open market rent for the lease period or, alternatively, an open market rent with either fixed increases or rent reviews which are no more frequent than every 5 years
3. A repair clause that amounts to a “limited repairing obligation by reference to a photographic schedule of condition”
4. A service charge that is fair, reasonable and capped.
5. A tenant break clause halfway though the term
6. A rent free period or rent concession as consideration for entering into a new lease.

Put simply, “good” for a landlord manifests itself as:

1. a fully occupied building,
2. occupied by financially stable tenants,
3. paying open market rents,
4. in a stable market, and
5. subject to watertight (landlord friendly) lease terms.

Lease terms that are deemed attractive to a landlord (and indeed its investors) will look something a bit like this:-

1. A term of 5 years and over.
2. A rent that reflects open market rent and provides an upward only rent review which is triggered frequently (for instance every 3 or 5 years of the term).
3. A repair clause that amounts to a “full repairing obligation” on the tenant, or alternatively, a robust service charge mechanism that passes on all maintenance and service costs to the occupiers of the building.
4. Avoiding break clauses where possible.
5. Avoiding rent free periods or rent concessions (therefore ensuring full rent is payable during the term of the lease).

In addition, ensuring the commercial premises is in good condition, regularly serviced and maintained, with high specification interiors, up to date eco-friendly and efficient systems should result in quicker lettings and less empty spaces; It is more difficult to let a property on landlord favourable terms if the property is not in good condition.

Yields is a way to measure profitability of an investment over a period of time, often annually. To put it another way, the yield is the income the investment returns over time, typically expressed as a percentage.

The yield is forward thinking and measures the income that an investment earns. In calculating a yield, one has to make an assumption that the income will continue to be received at the same rate.

In a property context, rental yield is the potential return on a property investment through rent. It’s a percentage figure that’s calculated by taking the annual rental income of a property dividing it by the price paid and then multiplying this by 100. Landlords and investors use rental yields to monitor the value of their investment property portfolios. It is often used as a benchmark figure when comparing other investment properties.

While rental yields can vary from postcode to postcode, they say that a good rental yield is:

1. between 5% and 7% for buy to let residential market; and
2. between 6% and 8% per annum in the commercial property market.

Please note however that the yield calculation is based on the returns and investment without taking into account any operational costs on the property (i.e. it doesn’t include the cost associated with purchasing the property, taxing the property and active management of the property either). There are ways in which one can boost a yield on commercial property, these include:

1. Increasing the rents paid by tenants.
2. Reducing the amount spent on operational costs.
3. Improving the state of your property through renovation, reconstruction, and routine maintenance.

A landlord can take several approaches to deal with a tenant’s failure to pay rent. These approaches are designed to rectify the breach by enabling the landlord to either recover arrears or re-take possession of their premises.

Forfeiture – Most commercial leases provide a right for a landlord to re-enter the property, terminate the lease and recover possession of the premises in the event of a breach of a tenant covenant (including non-payment of rent). This remedy known as “forfeiture” may be attractive to a landlord who has a tenant with a history of rental arrears. Furthermore, this is an attractive measure if the current market conditions are strong and the landlord believes they can find another tenant easily, possibly at a higher rent and with good financial standing. Forfeiture is not without its risks as a tenant can apply to Court for “relief from forfeiture” if they can show that arrears have been settled. Assuming those arrears have been settled, the Court may award the tenant relief allowing them to retake occupation (but this will be difficult if the landlord has already relet the property) or they could award the tenant damages. As the law surrounding forfeiture is technical, a commercial landlord should seek legal advice before exercising this option.

Withdrawal of rent deposit – If a landlord has secured a rent deposit from the tenant at the time the lease was granted, the landlord may be able to withdraw from the deposit to cover any rental arrears, subject to the terms of the rent deposit deed. This option maybe appropriate where the failure to pay rent is an isolated incident.

Pursue a guarantor or former tenant – If there is a guarantor under the lease, there may be a provision that obliges the guarantor to step into the shoes of the tenant and to pay the rental arrears. Equally, if a former tenant has guaranteed the rental obligations of the current tenant, the landlord will be able to pursue the former tenant for any sums due. Again, the availability of this remedy will depend on what is provided for in the lease.

Issue court proceedings – A commercial landlord can take their tenant to court to recover rent arrears. As this process can be lengthy and costly, a landlord can look to serve a statutory demand requiring payment. A statutory demand is served on a tenant and if payment is not made within 21 days, a landlord may use this to support a winding up petition. There are limitations to this course of action, however, this may prompt a tenant to make payment or to seek a payment plan. It is important to note that if an agreement is entered into, it will likely compromise the landlord’s ability to pursue any other remedies, provided the tenant complies with the terms of the agreement.

Commercial Rent Arrears Recovery (CRAR) – This method of recovering rent allows a landlord to instruct an enforcement agent who would take control of a tenant’s goods and sell them on in order to recover the debt. The procedure is complex and various notices need to be served on the tenant throughout various stages of the process.

To conclude, there are several remedies available to a landlord when a commercial tenant fails to pay rent. The best course of action will depend on each individual circumstances. Before deciding on how to proceed, landlords should think about what they want to achieve, including whether they want to maintain the landlord/tenant relationship, as well as the costs and consequences of the various options.

One of the most important provisions in a lease is the tenant’s obligation to repair the premises.

As a tenant, to understand your repairing obligation under the lease, there are 2 key points you need to understand fully:

1. The extent of the premises being demised to you; and
2. The extent of the repairing obligation.

What are your premises?

The scope of the tenant’s repairing obligation will depend on the physical extent of the premises being demised in the lease. Where a whole building is demised, the tenant’s repairing obligation will extend to the whole building.

Difficulties may arise where the premises are part of a larger property (such as a first-floor office in an office building). In such cases, each tenant will usually be responsible for repairing the internal shell of the premises and the landlord will maintain the exterior, structure and common parts of the building (and recover the cost of doing so through the service charge).

When drafting a lease of part (such as a first-floor office in an office building), care must be taken to ensure that there are no gaps or overlaps in the parties’ responsibility for repair. For example, who is responsible for the ceiling finishes? Are the windows included in the demise? It is therefore imperative that a detailed definition of the premises is included in the lease so that the tenant is aware of the extent of the premises that need to be maintained/repaired by it.

What is your repairing obligation?

Generally, there are two main elements of a repair obligation in a commercial lease:

1. The obligation to repair the premises during the term of the lease; and
2. The obligation to return the premises back to the landlord at the end of term in good repair.

A tenant will usually covenant to keep the premises “in good repair”. Please note however that a covenant “to keep the property in repair” includes an obligation to put the property into repair if it is in disrepair at the start of the lease

From a tenant’s point of view, repair should therefore be construed as narrowly as possible – limited to the renewal or replacement of defective parts only rather than a full repairing obligation. However, a landlord would prefer the tenant to be wholly responsible for all costs of repair and maintenance which would enhance the capital value of the demised premises, a requirement that most tenants would consider onerous . For this reason and to avoid any disputes in relation to repair during the contractual term, the respective obligations of the tenant and landlord must be clearly stated in the lease. For example, tenant’s repair obligation should not include “rebuild” which implies a greater burden on the tenant; certain words should also be avoided so that the standard of repair is not enhanced.

However, not all properties are in a good state of repair prior to leases being granted. If this is the case, a tenant may wish to negotiate a limited repairing liability under the lease; one way to do this is to agree a photographic schedule of condition with the landlord, the purpose of which is to record the current condition of the premises. That schedule can then be annexed to the lease with an appropriate lease provision obliging the tenant to keep the premises in good condition but in no better condition than as recorded in the schedule of condition.

The short answer is, it depends.

It depends on:

1.  the provisions in the lease; and/or
2.  the negotiating strength and bargaining power of the parties to the lease.

Please see below the possible scenarios that give rise to either the landlord or the tenant (or both) having rights to terminate the lease:

• Break clause: A break clause is a provision in a lease giving an option to a landlord, a tenant or both, to terminate the lease on a certain date (known as the break date). If the lease does contain a break clause, then the relevant party (normally the tenant) can exercise the break option provided it observes and complies with the break conditions (which will be set out in the lease). Failure to exercise the break clause conditions correctly will render the break option invalid and the right to terminate will be lost.
• Surrender: The landlord and/or tenant may wish to negotiate an early termination by way of a surrender. A surrender will often only be desirable if reasonable consideration is being offered to the other party as a sweetener to terminate the lease. A surrender premium is a payment payable by the tenant to the landlord to terminate the lease and a reverse premium is a payment payable by the landlord to the tenant to terminate the lease. Of course, this is a matter of negotiation and will largely depend on the bargaining strength of each party and the consideration being offered to the other party to bring the lease to an end. The party wishing to terminate the lease will, as part of its negotiation, undoubtedly offer to settle the other side’s professional costs and indeed any other reasonable costs in connection with the surrender.
• Assignment: The tenant may wish assign (i.e., transfer) the lease to someone else if the lease so permits. Most leases will not permit an assignment without the landlord’s prior consent. Most commercial leases require the tenant to obtain a ‘licence to assign’ from the landlord prior to parting with the lease. In most modern leases, an outgoing tenant will be required to enter into an authorised guarantee agreement with the landlord (the purpose of which is to guarantee the performance of the incoming tenant) as a condition of an assignment. Depending on the terms of the lease, the landlord may also impose further conditions before they will consent to such an assignment. The assignment provisions in the lease needs to be carefully scrutinised and understood before an application to the landlord for consent to an assignment can be made.
• 1954 Act Notices: For leases protected by the Landlord and Tenant Act 1954 (1954 Act), a Section 25 Notice can be issued by the landlord to bring the lease to an end at or after the contractual end date of the lease, provided that certain criteria are met. Conversely, a tenant can serve its landlord with a Section 27 Notice to bring the lease to an end at or after the contractual end date. If the tenant wishes to renew its lease and serves a Section 26 Notice, a landlord may wish to object to the Section 26 Notice by serving a Counter Notice within a specified period, citing the ground that the landlord is wishing to rely upon in terminating that lease.