Thinking of Letting (or Sub-letting)

Thinking of Letting (or Sub-letting) Some Space in Your Business Premises? What are the Key Points to Include in an Agreement?

Renting out unused space in your business premises can be an effective way of generating extra revenue for your business but beware of the pitfalls.

Are you able to grant a lease?

First and foremost you need to consider whether you are able to grant a lease. If you lease your business premises you may be prevented from sub-letting part or all of the premises by the terms of your lease. Your solicitor should carefully check the terms of the lease to make sure that sub-letting part or all of your premises will not be a breach of the terms of your lease.

Length of the lease

You should consider how long the lease should be. If you are sub-letting you will be required by the terms of your lease to ensure that any lease you grant to a sub-tenant will come to an end before the end of your lease. If you own your premises you should consider when you may require vacant possession of the property either for your own use or to sell to a buyer with vacant possession.

Landlord and Tenant Act 1954

Complications can arise if you do not contract out of the protection afforded to business tenants under the Landlord and Tenant Act 1954. If the Act is not excluded from the lease the Tenant may be entitled to require a new lease at the end of the original lease. Difficulties can arise for a Landlord seeking to recover possession of the property. In order to exclude the protection of the Act carefully drafted clauses must be included in the lease and the tenant must be served with a specific notice and provide a declaration before entering into the lease.

Break clauses

You may want to build in some flexibility as to the length of the lease. This is of particular importance if the lease is for a long period as your circumstances may change in the future. You may wish to give yourself the option to end the lease early and/or to allow the Tenant to do so. Careful drafting is required to achieve the desired result.

Rent Review

Another clause of significant importance in a long lease is rent review. The property market is continually changing and rent review clauses can, for example, allow you to increase the rent throughout the term of the lease so that it is kept inline with the current market. However rent can go down as well as up unless a carefully drafted rent review clause is included in the lease.

Assignment and Sub-letting

As a landlord you are able to include provisions in the lease that will restrict the tenant’s ability to assign the premises to a new tenant. It may be in the Landlord’s best interests to allow the tenant to assign especially if the tenant is or will in the future experience difficulty in paying his rent. However the Landlord should insist on the tenant first obtaining the landlord’s written consent to an assignment. If such a clause is not included in the lease a landlord may find his property has been assigned to undesirable or insolvent tenants.

Similar problems can arise with sub-letting. You may wish to restrict a tenant’s ability to sub-let parts of the property as this can result in the property being divided into a large number of unattractive plots with numerous sub-tenants.

Insolvency and Guarantor

A well drafted lease will protect the landlord from losing out financially if his tenant should get into financial difficulty. A third party can be forced to meet the tenant’s obligations under the lease or in an insolvency claim.

Forfeiture

Another way that a landlord can protect himself is by including a forfeiture clause in the lease. A robustly drafted forfeiture clause can enable a landlord to take back possession of his property in the event of non-payment of rent, breach of the tenant’s covenants under the lease or in the event of the tenant’s insolvency or likely insolvency. This is an effective and speedy method of minimising the loss incurred by a landlord and does not prevent the landlord from taking further action against the tenant for any losses already incurred.

In short

• Consider how long you would like to let the premises for and ensure that you can recover the premises at the end of the term

• Protect yourself from your premises ending up in the wrong hands

• Be sure that you can recover your property if the tenant does not pay rent, breaches its covenants or is likely to become insolvent

Sally Batchelor - Parrott & Coales LLP

Email: sally.batchelor@parrottandcoalesllp.co.uk