Key Terms to be on the look out for in Commercial Leases - Part Two

In a continuation of this series, we continue to cover some further key areas that both landlords and Tenants will need to consider.

Previously we covered the important of the Term of the Lease and Property definition. This part covers the important areas when looking at the Annual Rent within Leases.

Annual Rent

Landlords, when taking on Tenants, may require additional security. This is to ensure that they are going to be covered in the event the Tenant defaults on their rent – particularly when new businesses are the proposed Tenant. There are two main methods which a potential Tenant may be asked to enter into: a Rent Deposit Deed, and/or an individual to act as Guarantor in the Lease.

A Rent Deposit, as contained in a Rent Deposit Deed, is a payment (usually for equivalent of either 3 or 6 months rent) payable on Completion of a Lease that the Landlord during the Term. The Rent Deposit can only be used by the Landlord in a select number of situations, such as where the Tenant defaults on payment of the Rent or the Property is forfeited. If none of the scenarios occur, the Rent Deposit is paid back to the Tenant at the end of the Term. A Landlord must ensure before Completion that they have an holding account set up to pay the rent deposit into, to ensure that the money is protected, only to be used when one of the stated scenarios occur and accounting is done to clearly demonstrate when monies have been taken form the account.

A Guarantor (or a Surety) is a party to the Lease, whom will become obligated to fulfil the Tenant’s obligations when they are unable. For instance, if the Tenant becomes insolvent, the Landlord will then be able to call upon the Guarantor to pay the rent owed by the Tenant. A Guarantor is likely to be shareholders of a company becoming the Tenant, so they become personally liable in such events. Where there are multiple Guarantors, Leases are often drafted so liability is several and separate – meaning that all guarantors are liable but the liability can be shared between them.

A consideration for the Tenant when taking into account their costs associated with the Lease, is whether Value Added Tax, known as VAT, is payable on their Annual Rent. The default position is that where a lease is granted, this is lease exempt from paying VAT. However, where the Landlord is able to prove that the Property has an Option to Tax from HMRC, VAT will be payable. The Option to Tax is an acknowledgement from HMRC that the Landlord has registered the Property that.  The Landlord must ensure that they have a copy of their Option to Tax acknowledgement before they begin the lease negotiation to ensure a smooth process.

Depending on the Term of the Lease, the Landlord will want to ensure that are getting the appropriate level of Annual Rent for their Property, taking into account the rentable market value. A mechanism that the Landlord will use to ensure this is via a rent review clause. A Rent Review clause can be drafted so when the rent is reviewed, the rent can only be amended upwards and is based upon the market value (as determined by an Independent Surveyor). When negotiating Leases, the Tenant will need to be aware of when Rent Reviews are scheduled to occur, and if these align with any break clauses.

About HCB Solicitors

At HCB Solicitors, our team specialises in Commercial Property matters, acting for both Landlords and Tenants on a variety of matters such as leases, licences to assign to sale / purchases. We ensure that we keep the commercial objectives of the client at the forefront of our approach. We are specialist solicitors in Commercial Property who believe in charging fair and manageable legal costs for our clients.  We will always be up front with our client about costs and work required early on.

Please do get in touch for further discussion with one of our specialist Commercial Property solicitors as to how we can assist on 0121 703 2580 or email michellefreeman@hcbgroup.com.