Assignment: An assignment of a lease is when a tenant (assignor) transfers their entire interest in the property to another party (assignee). The assignee will take on the remainder of the unexpired term of the lease.
Break option: A break option, or break clause, allows either the landlord or tenant the right to determine the lease at an agreed point before the lease ends. In order for the break option to be exercised, a written notice must be served to the other party within an agreed time period, which is usually three to six months before the date that the lease will be terminated.
Building insurance: An insurance policy which covers the landlord against damage, destruction and loss of rent for their buildings. The tenant of a commercial lease is usually responsible for reimbursing the landlord’s premium.
Contents insurance: An insurance policy undertaken by tenants to insure against damage, destruction and loss of their goods and fixtures within the building.
Dilapidations: A Schedule of Dilapidations covers the condition of a building, and the items of repair and maintenance that should be undertaken by the tenant.
The tenant is obliged to carry out the outstanding works listed in the schedule, or to pay damages covering the cost to the landlord for carrying out the required works instead.
A Schedule of Dilapidations can be served either at the end of the lease (known as a Terminal Schedule of Dilapidations), or at any time during the terms (known as an Interim Schedule of Dilapidations).
Energy Performance Certificate: An Energy Performance Certificate (EPC) records how energy efficient a property is as a building and provides A-G ratings. These are similar to the labels now provided with domestic appliances such as refrigerators and washing machines.
An energy performance certificate is only required when a building is constructed, sold or rented.
Fixtures & fittings: A fixture is an item than has been annexed to the property to such an extent that it becomes part of it and requires significant force or damage to remove it. A fitting is something that can be easily removed from the building.
Landlord’s fixtures and fittings usually include: non-structural demountable partitions, kitchens, individual air conditioning units and carpets.
Freehold: Under the Law of Property Act 1925, the definition of freehold is namely the ‘fee simple absolute in possession’ which in essence means the ultimate owner of a building, which usually includes the building, air above it and ground below.
Full, Repairing and Insuring (FRI): The tenant will be responsible for the full repair of the property, in addition to reimbursing the landlord’s building insurance premium.
Ground lease: This is usually a long lease for a term from 30 years up to 999 years, granted at a ground rent but subject to an initial premium.
Ground rent: A ground rent is a payment of rent relating only to the value of the land. Ground rent levels vary from a peppercorn (nil rent), to a percentage of the open market rental value of the building on the land.
Incentive: An incentive is a payment or concession made by a landlord to a tenant, as means of making the lease more attractive or competitive against other properties on the market. This may be through a one-off payment to the tenant, or by means of a rent-free period or stepped rent until the first rent review.
Internal Repairing and Insuring (IRI): The tenant will be responsible for the repair of the property’s internal surfaces only, but generally includes the glass. The tenant will also be responsible for reimbursing the landlord’s building insurance premium.
The landlord will be responsible for the exterior and common parts, and the structure of the overall building, and will generally seek to recover the cost of his liability through a service charge.
Landlord and Tenant Act 1954: The 1954 Act is essentially the statutory framework surrounding a relationship between landlord and tenant with regards to the occupation of a commercial building. In essence, Part II of the Act provides a business tenant with: (i) security of tenure and the right to apply for a new tenancy, subject to specified grounds for opposition, and (ii) a right to compensations (in certain cases) upon opposition to a new continued tenancy, for improvements or disturbance.
The 1954 Act does not protect all business tenancies, and there a strict notice procedure in place to maintain protection of tenants’ rights under the Act.
Leasehold: Under the Law of Property Act 1925, the definition of leasehold is ‘an estate that is held for a term of years certain’, or on a periodic tenancy basis, for a length of time less than the landlord’s interest.
A lease usually provides a tenant with exclusive possession for a fixed period of time, in exchange for a payment of rent or premium.
Licence: A licence in property terms is essentially a form of contract authorising a tenant to use and occupy premises for an agreed period of time at an agreed ‘fee’, as opposed to ‘rent’ in terms of a lease.
A licence does not transfer any ‘interest’ in land, nor does it provide the licensee with the security of tenure rights set out in Part II of the Landlord and Tenant Act 1954.
Private treaty: This is the most common form of buying/selling commercial property and it involves a binding private contract between buyer and seller for the sale of a property.
Quarter days: Traditionally the days on which rents were paid quarterly in advance. The traditional quarter days are 25th March, 24th June, 29th September and 25th December – however, the quarter days that will apply to most modern leases will be 1st January, 1st April, 1st July and 1st October.
Rating liability: Similar to council tax liability on a residential property, rating liability is a charge based on the occupation of commercial land and buildings, administered by the local authority.
The ‘rateable value’ of a property is assessed by the Government’s Valuation Office and indicates the rental value of the property at the date of valuation.
References: When a new tenant enters into a lease, the landlord may request to see satisfactory references, as a condition of the lease being granted. It’s usual for the landlord’s agent to obtain references from the tenant’s bank, accountant and two trade references.
Rent: Money paid by the tenant to the landlord for occupation of a commercial building for a period of time. Under standard leases, rent is payable to the landlord quarterly in advance, payable on the quarter days.
Rent deposits: When a new lease is entered into, it’s usual for the landlord to request a rent deposit from the in-going tenant, which will be held in an account to act as financial security in case of default by the tenant. The deposit will be held until throughout the term of the lease, or until the financial integrity of the tenant becomes established.
Landlords usually request deposits of between three to six months’ rent in advance.
Rent reviews: Rent review provisions in commercial property leases are aimed to counter the effect of inflation during the term of the lease.
A standard rent review clause will generally require the rent to be reviewed a fixed intervals, usually every three or five years, during the term. The majority of rent review clause requires the rent to be reviewed to the open market rent, at the review date, or the current passing rent, whichever is greater. Essentially therefore, the rent review is upward only and can’t fall below the passing rent payable. The rent must be reviewed in accordance with specific terms within the lease.
However, some rent reviews are geared to the tenant’s turnover or profitability, and (increasingly on short leases) changes in the Retail Price Index.
Repair covenants: See definitions for FRI or IRI
Service charge: A service charge is a payment made by the tenant to the landlord on account for services provided, which typically would include the repair and maintenance of the building’s external structure, repair and maintenance of communal parts, water, and maintenance of grounds and car parks.
A service charge usually arises when a building is let to multiple tenants, and is often paid quarterly in advance in conjunction with the rent.
Service charge code: ‘Service Charges in Commercial Property’ is an industry-endorsed RICS code of practice. The code for England & Wales came into force on 1st April 2007 and essentially contains the most desirable structure for service charges to ensure they are effectively managed.
Stamp duty: As with residential property, stamp duty is payable on all commercial purchases, but in addition on some leases and agreements for leases. The current rates, based on transaction value are as follows:
- 0 to £150,000 (annual rent under £1,000) – Zero
- Over £150,000 - £250,000 (annual rent £1,000 or more) – 1%
- Over £250,000 - £500,000 – 3%
- Over £500,000 – 4%
Sub-letting: A sub-letting takes places when a tenant grants a new lease on part or the whole of their property to another occupier, for a period less than the residue term of their lease.
The term of the sub-lease must be at least one day less than the unexpired term of the superior lease.
Tenant’s improvements: A tenant’s improvement is used to describe work undertaken by the tenant to the property at their own cost, and usually requires the consent of the landlord.
Most rent review clauses will include a provision whereby any improvements by the tenant will be ignored for the purposes of assessing the revised rental value, provided consent from the landlord was initially obtained.
User clause: A contractual provision within a lease that states the permitted use of the property and those that are prohibited.
VAT: Generally, commercial properties are exempt from Value Added Tax – however, landlords may elect to charge VAT on their property. This tax will be paid by the tenant in addition to the rent, and in addition to the sale price if the property is sold.