Posted: Wednesday, 22 February 2012 @ 13:05
Be pro-active. Get yourself on the front foot and ready to deal with any issues. This means understanding the terms of your lease and the type of disputes that can crop up and when they are most likely. A good start would be to sign up to our Commercial Lease Renewal service. We will highlight the issues for you and give you diary dates for action.
The most common issues with commercial leases are:
1. Rent reviews
2. Lease renewals
3. Service charges
4. Dilapidations (repairs)
5. Rent arrears
Looking at these in some detail:
Rent Reviews
Often found in long leases, with reviews every 5 years being common. Annoyingly for tenants, the leases often proved that the reviews can be upward only, so no option for a reduction in a falling market. It is important to understand the timetable and to be aware that in most cases even if the review has been carried out late it can be backdated, which could have serious implications for cashflow.
My strong advice is to appoint a professional valuer at the earliest opportunity, say 3 months before the review date, to advise you on the market rent based on the lease terms. This will not only give you an indication of the likely outcome, but will give you time to make provision for payment of any increased rent. Most rent review clauses nowadays have a mechanism to resolve any disputes. This may be a requirement for disputes to be determined by a single expert valuer, by arbitration, or by mediation. If there is no provision, then it may be possible to reach agreement on an appropriate method of dispute resolution, otherwise the ultimate forum will be the courts.
Lease Renewals
With leases which have the protection of the Landlord & Tenant Act 1954, leases will continue beyond their expiry date until they are brought to an end either by the landlord or the tenant giving a statutory notice to determine the lease at least 6 months in advance of the date specified in the notice.
The tenant has the right to a renewal lease, but the landlord has a number of statutory grounds on which he could oppose the renewal, and he is required to give notice of any such intention. But the tenant must make application to the court for a new lease before the statutory notice expires, otherwise the tenant will in any event lose the right to have a new lease granted. Only in limited circumstances is it possible to extend the period by consent in writing. So if the tenant wants a new lease it is very important to make sure that the rights to a renewal lease are protected.
Most often the only dispute concerns the terms of a new lease. Again, my strong advice to the tenant is to seek early advice from a professional valuer on the market rate for rent under a renewal, and from a property lawyer on the steps which must be taken to protect the right to renewal and tactics to use to gain the best advantage. Diarise this matter for action at least 12 months before the contractual expiry date of the lease. It may be that the tenant will be advised to take charge and start the process by serving a statutory notice on the landlord bringing the lease to an end at the earliest opportunity, namely on the contractual expiry date.
Service Charges
Service charges, particularly on large commercial estates, can give rise to annoyance and dispute. But again it is important to understand the terms of the lease. If it is not a straight forward provision, obtain legal advice on the terms and in all cases engage with the landlord at the earliest opportunity.
The RICS has prepared a Service Charge Code of Practice and information papers and an Occupier Guide to support the code. The code is not mandatory, but has been prepared in the words of the RICS “to promote consistency, fairness, transparency and best practice”.
Dilapidations (repairs)
It is quite often the case that disputes over dilapidation do not arise until the end of a lease, and usually after the landlord has regained possession and inspected the property. The tenant then receives a professionally prepared schedule, with costings, and a demand for payment of a significant sum of money in compensation. At this stage the tenant is already in a position of serious disadvantage.
Repairing covenants in leases usually provide that the tenant is to keep the property, or defined parts of it, in substantial repair. It is vital that the tenant understands the full extent of this repairing covenant, and is aware of it from the start of the lease. The obligation is ongoing, not just at the end of the lease, but that is when on many occasions the chickens come home to roost. Mixing my metaphors, too many tenants bury their heads in the sand.
To protect themselves tenants should be pro-active. Perhaps they should undertake an annual inspection and remedy defects on a regular basis. But what they must do is to have a professional inspection and survey carried out and schedule drawn up perhaps 4 to 6 months before the end of the lease, with photographic evidence of the condition of the premises. The tenants should then carry out repairs to comply with the repairing covenant, before the end of the lease, and have these recorded by the surveyor.
It is invariably cheaper for the tenant to do the repairs than it will be for the landlord. It would also be advisable to get further photographic evidence of the premises after it has been cleared at the end of the lease, just before the keys are handed over. It is always a dangerous move to leave any tenant survey until after the end of the lease, when the property may have deteriorated further and evidence of the state of the premises at the lease end is no longer available.
If there is a dispute over repairs there is a Pre-Action Protocol, originally introduced by the Property Litigation Association back in 2002, and endorsed by the RICS as best practice. This has now been amended and has been given added importance by the fact that since 1 January 2012 it is a court approved Pre-Action Protocol, which means that parties are expected to follow it or face sanctions by the courts.
The protocol provides a timetable, for example, that the landlord should send his schedule of dilapidations to the tenant within 56 days of the end of the tenancy, and that the tenant should respond within a further 56 days. The landlord and tenant and/or their surveyors should then meet within 28 days. In the event of a dispute they should consider an alternative dispute resolution procedure, such as mediation, with court action being a method of last resort.
Rent Arrears
If you get into any difficulties with payment of rent, always contact the landlord before default and see if you can negotiate an agreement. The landlord may be willing to allow you to pay monthly rather than quarterly, if only for a limited time. If you are in a very serious position, the landlord may renegotiate the lease rather than lose a tenant, particularly if the premises are situated in a depressed area for commercial leases.
But always be aware of the landlord’s weapons. The landlord could send in commercial bailiffs to seize your goods, what is known as distraint. The landlord could just peacefully enter the premises and change the locks, bringing the lease to an end. This is known as forfeiture. Normally the lease will say when the landlord can do this, for example after the rent is outstanding for 21 days. If this happens the tenant can apply to the court for relief from forfeiture, but must act quickly and be in a position to pay all arrears, interest, and the landlord’s costs.
Conclusion
The moral of my story is that in all cases you should be aware of your liabilities at all times, and remain on the front foot, and to ensure this you should take early professional advice.
Nigel Musgrove
Business and Litigation Solicitor
Tel: 0845 003 5639
For free advice on this topic please call us on 0845 003 5639.
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a
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