All businesses need somewhere to operate from, whether that is a room in your home, a serviced office, an industrial unit or a retail shop. Whilst some people might purchase the premises most businesses initially look to rent their business premises.

Finding the right property can take some time, but once you’ve done that and agreed terms with the landlord, the lease itself will still need to be negotiated and agreed. Clients are often surprised at how long this process can take as they may have already spent many months finding suitable premises and agreeing the terms either with the help of an agent or direct. There is also often a misconception that once heads of terms are agreed the legal documentation will be relatively straightforward. However heads of terms are not legally binding and are usually no more than two or three pages long, whereas a standard lease can be anywhere between 30 to 80 pages and will set out in much more detail the specifics of the terms that have been agreed. As a general rule it usually takes 6 to 8 weeks from receipt of papers from the landlord’s solicitor to agree and complete a lease, where full due diligence is being undertaken although of course time periods can vary depending upon the complexities of the transaction, issues with the landlord’s title and the parties own time frames.

In this article, we explore the main documentation that will be entered into on a standard lease of commercial premises where the landlord owns the freehold and the due diligence process involved.

Documentation

You can expect the following documentation to be negotiated

1. Lease – this is the main document and will set out the parties, the area being rented and the terms of occupation such as the length of the Term of the Lease; the Rent payable; any break rights, any rights for the Tenant over common areas, the tenant’s repair obligations and any restrictions on use etc.
2. Rent Deposit Deed – a rent deposit may be required to provide the landlord with security for payment of the rents and other sums due under the lease and compliance with the lease covenants. This is often required if the tenant is a newly incorporated business or does not have at least three years trading accounts to show satisfactory financial status. The payment of this deposit to the landlord and the terms on which it is held will be documented in the rent deposit deed.
3. Licence for Alterations – this may also be required if the tenant wants to carry out works to the property to fit it out according to its own proposed use. Again clients are often surprised at the need for this and when asked if they have any proposed works to the premises will often say they don’t. It is worth noting however that landlord’s consent will usually be required for any internal non-structural alterations to the property and that this includes alterations to flooring and carpeting, changes to lighting, installation of alarms and CCTV, installation of fire systems as well as alterations to the layout of the property, installation of internal demountable partitioning in an office; racking in an industrial unit or tills in a retail shop. This is however an area that can delay completion as the landlord will want written details and if relevant plans showing the proposed works and these will need to be fully documented in the licence before the work can start. Ideally therefore the licence should be completed at the same time as the lease, otherwise the tenant will take up occupation but will be unable to commence its works.

Your solicitor will review and negotiate these documents on your behalf, to check that they reflect the agreed heads of terms (although as stated above there will be substantially more terms in these documents than in the heads of terms themselves). Your solicitor will seek to amend the lease to make it more tenant friendly, watering down any obligations it considers unreasonable and will add in any terms that are missing from the agreed heads of terms or delete provisions that were not specifically agreed in the heads of terms. The negotiation of the documents can take some time with the documents going back-and-forth two or three or more times between the landlord’s and the tenant’s solicitor until they are in an agreed form. Your solicitor should take your instructions on any points that cannot be agreed and once the documentation is in an agreed form they should provide you with a report on the main terms, to be read in conjunction with the documents themselves prior to completion.

Title investigation 

At the same time as negotiating the documents your solicitor will investigate the landlords title to the property to ensure that the landlord named on the lease is the registered owner of the property. They will also check whether there are any third-party consents that may be needed for the grant of the lease, for example, from the landlord’s lenders; or whether there are any restrictions on the landlord’s title which would prevent the property from being used for your proposed business use. Your solicitor may raise enquiries of the landlord’s solicitor on any issues on the title which are of concern.

Due Diligence Enquiries/Searches

• The landlord’s solicitor should provide replies to standard pre-lease enquiries (CPSEs) which are a set of enquiries that were compiled by members of the London Property Support Lawyers Group to illicit certain standard information about the property for example the authorised planning permission, details of any additional charges that might affect the property, details of any service charge payable if the property is part of a building or an estate etc and to request copies of all relevant statutory certification that should be in place in respect to the property for example a gas safety certificate; an electrical installation condition report; an asbestos report; a fire risk assessment etc which you, as tenant, will then be required to maintain and renew as applicable.

• In addition, your solicitor should advise you to have searches carried out at the local authority and other public bodies which will provide further information about the property. The usual searches are:

1. a local search – this is a search of the registers held at the local authority giving information about the authorised planning consent for the property; whether the property is listed; whether there are any charges that affect the property; whether any breach notices have been served in respect of the property; any information regarding adjoining roads parking and other restrictions etc
2. a chancel check – this is a check to see whether the property is affected by an archaic liability to contribute to the cost of maintaining the chancel of any local Parish church. The liability attached to the freehold but can be passed down to tenants under the lease obligations. In the absence of any note of this on the landlord’s title, it is usually possible to obtain insurance against the risk of being asked to contribute to such costs if the property is shown to be in an area where such liability may exist. Alternatively, it may be possible to exclude such liability from the lease so that the liability to contribute rests with the landlord as freehold owner.
3. a drainage and water search  – this will confirm whether or not the property is connected to mains water and drains into the public sewerage system. It will also identify any public mains within the boundaries of the property in respect of which there would be restrictions on development
4. an environmental search – depending on the type of business premises an environmental search may be required. This is just a desktop search looking at historical data to establish whether or not there is a risk that the land on which the property is built could be contaminated. Depending on the circumstances it is possible that a tenant who has a repair liability in respect of such land could be called upon by the environment agency to remediate contamination. The risk of this will be lower if the lease if of part of a building on one of the upper floors than were it is a lease of land for industrial or manufacturing uses. The question of environmental liability is complex. If an adverse search result comes back your solicitor would need to provide you with more detailed advice as to the options available.
5. a flood search – depending on whether the property is located near to a river or other water course a flood search may be necessary
6. a mining search – again depending on where the property is located, a mining search may be required.

REPORTING

Once the documents are agreed and your solicitor has completed its due diligence, they will report to you on the terms and their findings.

LTA1954 EXCLUSION PROCEDURE 

A tenant who enters into a lease of business premises may have a statutory right to remain in occupation following expiry of the fixed term of the lease and request a new lease from its landlord, which the landlord must grant unless it can satisfy one of these statutory grounds for refusal. It is however usual for this statutory right to be excluded. In order to do this, the landlord must serve a warning notice on the tenant before the lease is entered into (or if applicable, before any agreement for lease is entered into) and the tenant (or where it is a company, partnership or other legal entity, somebody authorised on behalf of that entity) must provide a declaration that it understands and agrees to this statutory right being excluded. Dependent upon the timeframe for completion this declaration may need to be sworn in front of an independent solicitor i.e. not the solicitor acting for the tenant. The landlord’s solicitor will want to see a copy of the sworn declaration before it completes the lease.

ENGROSSMENTS & SIGNING PROCESS

Once you have confirmed that you are happy with everything your solicitor will request engrossments from the landlord’s solicitor. These are the agreed form documents in their final form for signature.

According to the Law of Property Act 1925 a disposition of land must be in writing and if it is a lease of more than three years it must be executed as a deed i.e. by the relevant parties by way of wet ink signature. Depending upon whether the tenant is an individual or a company the signature on behalf of the tenant may need to be witnessed by an independent i.e. non-related adult witness. Since COVID, the use of electronic signatures has become more common although the validity of signing the disposition of land in this way has not yet been codified in law. HM Land Registry has however set out various requirements that it has in respect of registrable dispositions of land which require both parties to be represented by solicitor and for the electronic signing process to be controlled by a solicitor through the use of an acceptable signing platform. Most solicitors now use Docusign or Adobe sign for this purpose. Whether the document is signed electronically or as a hard copy with a wet ink signature, the witness for the signatory will need to be physically present with the signatory at the time that they sign the documents.

The availability of signatories and this execution process needs to be factored into any timescales for completion.

The landlord will execute an identical set of documents and on completion the signed and dated documents will be swapped so that the tenant ends up holding the parts signed by the landlord and vice versa.

COMPLETION SEARCHES

Once the documents have been signed and returned to your solicitor, they may need to carry out certain pre-completion searches at the land registry or the land charges department which may take a couple of days.

Your solicitor will also ask for confirmation as to whether or not any money needs to be collected on completion, in respect of rent insurance and service charge for example and they will then request this money from you, together with any rent deposit money, if applicable.

These monies will be forwarded over from your solicitor to the landlord’s solicitor to be held to order pending completion. Again, the need to arrange for payment of these monies into your solicitor’s client account and the transfer to the landlord’s solicitor’s client account needs to be factored into any timescales for completion.

COMPLETION

Once both parties’ solicitors have confirmed that they are holding signed documents and any relevant money have been received by the landlord’s solicitor the solicitors will arrange a call to complete the documents. Once completed, the landlord’s solicitor will advise its client that keys can be released to the tenant and the tenant will be able to take up occupation of the premises.

POST COMPLETION MATTERS

From a tenant’s point of view, completion of the legal documents signifies the start of their rights of occupation however there may still be some matters that need to be dealt with by their solicitor, depending upon the length of term of the lease and level of rent.

• SDLT – the grant of a lease may attract stamp duty land tax which is generally payable to HMRC within 14 days of completion of the lease (or earlier occupation of the property). The amount of SDLT will depend upon the term of the lease and the level of rent and your solicitor should be able to calculate this for you and assist you in submitting the SDLT return and paying the monies due.

• REGISTRATION – again depending upon the length of term of the lease, the lease may need to be registered at HM Land Registry and will be given its own leasehold registered title number. If it is not capable of registration the easements (rights) granted in the lease should be registered against the landlord’s title or at the very least the lease should be noted against the landlord’s title. The general position is that leases of seven years or more must be registered at HM Land Registry to take effect as a legal interest in land. Leases of less than seven years, but more than three years can be noted against the landlord’s title and leases of less than three years cannot be noted against the landlord’s title, but in both cases the easements can be registered. This then protects the tenant’s rights of occupation, as it provides any purchaser of the landlord’s interest with notice of the tenant’s interest.

The process of taking a lease of business premises is complex and can take some time. Whilst the tenant does not have to have a solicitor act for them and is free to review and negotiate the lease and any other letting documents itself, it is advisable to instruct a solicitor who can explain the legal obligations in the documents being entered into and carry out the full due diligence process referred to above, as well as assisting with the SDLT requirements and registration of the lease or easements.

CONTACT

Moorcrofts Commercial Property Team provides legal advice to owners and occupiers of commercial property, with a particular specialism in Tenant representation as well as having extensive experience advising corporate occupiers on all aspects of leasehold acquisitions and disposals. For more information regarding Moorcrofts commercial property services, contact Julia Ferguson on: 01628 470009 or julia.ferguson@moorcrofts.com.