A commercial lease is a tricky beast, and tenants need to be clear about the extent of the potential liabilities they are accepting, reports Philippa Aldrich
As the credit crunch begins to bite, all businesses will be carefully reviewing their overheads. Premises costs are usually one of the biggest.
One of the most expensive mistakes commercial tenants can make is to assume that certain major areas of expenditure are the landlord’s responsibility. So what should tenants be looking out for?
Repair and maintenance
All leases will set out the tenant’s obligations in relation to the maintenance of a property. But the precise meanings of words generally used to describe a tenant’s repairing obligations have been settled over many years of court decisions, and the implications of certain phrases are not always obvious.
For example, a covenant ‘to keep the property in repair’ includes an obligation to put the property into repair if it is in a state of disrepair at the start of the lease. A tenant who has entered into a lease which contains this obligation and has decided to proceed without a survey, may find themselves paying for repairs of which they were not even aware.
An obligation to `keep the property in good condition’ can require works to be carried out even if there is no disrepair.
A covenant to `renew’, on the other hand, may extend to rebuilding the whole property if that is necessary to achieve repair. And the word `repair’ itself may include remedying and removing the cause of an inherent defect, such as a defect in the original construction or design of a building. This will even be the case if the building is several years old and the tenant has had no involvement with its construction.
In multi-let buildings, the landlord will often take responsibility for the maintenance of the structure and the common parts of the building and then recover the cost from the tenants via the service charge.
Service charges are one of the most often contested areas of commercial leases, and there is little statutory protection for commercial as opposed to residential tenants.
Again, close attention to the wording of the lease is important to make sure that the landlord is not only obliged to maintain those services which the tenant needs to operate from the premises – such as lifts, car parks and shared air-conditioning – but also that the cost is shared fairly.
For example, in a mixed use building with ground floor shops and offices on the upper floors, the retail tenants should not be paying for the costs of maintaining the lifts which solely service the offices.
It also worth considering carefully the areas of expenditure listed in the lease where the landlord is entitled to recover the costs from the tenant. For example, tenants should not assume that the cost of an expensive upgrade of the common parts of a building, which is designed to attract more tenants, will necessarily be borne by the landlord.
In commercial leases, business rates are generally the tenant’s responsibility and tenants might also anticipate that they are free to claim the benefit of any rate reliefs. But it is common for commercial leases to provide that the tenant will compensate the landlord for any empty property rating relief that the landlord `loses’ after the end of the term because it has been awarded to the tenant. This can be costly.
Disability Discrimination Act 1995 (DDA)
The DDA requires a `provider of services’ to take positive steps to make its services accessible to disabled people, which may include making physical adjustments to the property’s access. This new duty is not only the concern of landlords – it falls on whoever is providing the service – and this can be the landlord, tenant or even both.
It is usually the tenant’s responsibility to comply with all relevant laws in relation to a property, including those relating to fire prevention. The statutory regime has recently changed.
Under previous legislation, if a fire certificate had been issued, tenants could be confident that the property complied with the fire standards. But fire certificates have now been superseded by the Regulatory Reform (Fire Safety) Order 2005, which came into force in October 2006.
The order imposes a new regime of self-assessment, more in line with health and safety regulation, and a tenant is likely to be the `responsible person’ for ensuring compliance in relation to the property it occupies. And compliance can be expensive. For example, in an extreme case, the tenant may be required to pay for the installation of a sprinkler system.
Where property has been previously contaminated, a remediation notice requiring it to be cleaned up is generally served on the landlord rather than the tenant.
But commercial leases will often provide that the tenant is responsible for complying with all legislation in relation to a property, and in particular for carrying out any work required by law.
Such a clause would make the tenant liable for the clean up of historic contamination, even where the notice was served on the landlord. However, if a remediation notice is served on the landlord and the notice is not complied with, it is the landlord and not the tenant who will incur criminal liability.
In addition, there may be circumstances when the tenant could be liable to carry out remediation works by virtue of other obligations in the lease, for instance a covenant to comply with health and safety legislation or to maintain the property.
Energy Performance Certificates (EPCs)
The obligation to produce EPCs will now apply to commercial as well as residential premises. In the case of new leases, the production of such certificates is the responsibility of the landlord.
But EPCs also apply to the disposal (or `assignment’) of a lease by a tenant and also the grant of a sub-lease – where a tenant grants a new lease to a third party.
In the case of an assignment, the assigning tenant needs to provide the EPC to the incoming tenant. Where a tenant proposes to sub-let its property, it has to either negotiate with the landlord to obtain an EPC for the whole building (as long as there is a common heating system) or obtain an EPC for the part of the building that it being sub-let.
Regulation 4 of the Control of Asbestos at Work Regulations 2002 came into force on 21 May 2004, and created a significant new duty to manage asbestos risk in `non-domestic premises’.
This includes determining whether asbestos is present in a building or is likely to be present, and managing any asbestos that is identified. The broad definition of `duty holder’ means that, under Regulation 4, a wide range of people will be liable and, like the DDA, this can include tenants as well as landlords.
Commercial leases are essentially commercial contracts which regulate the relationship between landlord and tenant.
Tenants need to be clear at the outset of the relationship of the potential of the liabilities they are accepting. Leases are complex and technical documents. Professional advice is essential as misinterpretations can be very expensive.