Commercial Property Update
December 2009
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Landlord & Tenant – The Code for Leasing Business Premises This Code was introduced some two years ago and was initially being widely implemented. However, the commercial property market is now somewhat different in view of the economic climate and it could be argued that current market conditions have actually done more to improve the negotiating position of a Tenant rather than the voluntary Code itself. Notwithstanding this, the Code is still a useful tool for a starting point for negotiations and the key points include : - Break clauses – the Code states that the only pre-conditions to a Tenant exercising a break clause should be that (i) the basic rent is paid to date; (ii) the Tenant gives up occupation of the premises; and (iii) there are no continuing sub-leases. The rather simple pre-conditions were intended to avoid a Tenant being caught out by minor technicalities, i.e. for not having painted the premises in the correct timescale or for not painting with the correct number of coats of paint. Further, the intention is that disputes about the state of the premises should actually be settled after the option has been exercised. The key point is that a breach of covenant by a Tenant should not prevent the break clause being exercised as either party can still, in any event, claim damages for any breach; Assignment – the Code recommends that authorised guarantee agreements (AGA) should not be required as a condition of an assignment unless the assignee is of “lower financial standing” than the assignor, or if the assignee is resident or registered overseas. Unfortunately, “lower financial standing” is not defined, although it is commonplace for a Tenant amendment to state that the Landlord can only require a AGA “where reasonable”. The absence of an AGA does, unfortunately, reduce the Landlord’s option in the event of a Tenant being in breach of covenant and Landlords will, in any event, always seek to require an AGA;Subletting – the Code states that any sublease rent should be the market rent at the time of the subletting rather than the higher of either the market rent at the time of the subletting or the rent passing under the lease itself. This does reflect market reality, in any event, and this is now widely accepted by Landlords;Alterations – the Code recommends that the Landlord retains control over alterations and changes of use but should not be any more restrictive than is necessary in order to protect the value of the Landlord’s reversion. The Landlord’s consent should not be required for internal non-structural alterations unless such alterations could affect the services or systems in the building. The Code merely states that the Tenant should simply notify the Landlord of any internal non-structural alterations and that any reinstatement should only be required “where reasonable” with the Landlord notifying the Tenant of its requirement for reinstatement at least six months prior to the expiration of the lease term.At the end of the day, supply and demand will actually dictate what lease terms will be acceptable. However, in the current market, a Tenant would expect even more favourable terms than those suggested by the Code. |
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