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Property: Rent & Service Charges

As a tenant, it is important that you know exactly how much rent you will need to pay to the landlord, and when.

Usually, rent is paid quarterly in advance (i.e. 4 times a year), but a Lease may provide that rent is paid monthly or weekly. Sometimes the landlord may grant a tenant a “rent free period” so that the tenant does not need to pay rent at the beginning of the Term, but only after a specified amount of time. There may also be a “rent review” clause, whereby at the end of a specified period (usually 5 years), the rent is revised in accordance with the current open market rental values.

As well as rent, if a tenant is taking a lease of part of a building, such as a unit in a Shopping Centre, the tenant will be likely to have to pay insurance and service charge (see below).

Insurance

It is usual that the landlord will insure the property against a specified range of insured risks, and the tenant will bear the cost of such insurance. If an insured risk causes damage to the property, usually the effect is that the tenant will not need to repair any damage, the landlord will be obliged to reinstate the premises, and rent will be suspended until the premises is reinstated.

Service Charges

In the case of a Shopping Centre, the landlord will want to recover the expense of a wide range of services including cleaning and maintaining common areas, gardens, parking areas, air-conditioning, lifts, central heating, and providing security and cleaning staff. Usually, a tenant will pay an amount in advance, and then there will be a balancing charge at the end of the year where an adjustment is made to reflect the actual expenditure incurred. Either the tenant will need to make up any shortfall in advance payments, or a surplus is stated to be held over to set against expenditure incurred in the succeeding year. 

Assignment/Subletting

There are often restrictions in a Lease on a tenant assigning their lease (i.e. transferring the existing Lease to a third party) or subletting the premises (i.e. transferring the Lease to a third party for a period less than the Term of the lease, before taking the Lease back). Often, the Lease will provide that a landlord must not unreasonably withhold or delay consent to a tenant’s request to assign or underlet, although there may be circumstances in which consent to assignment may be withheld, or conditions to which consent will be granted. For instance, a landlord may make it a condition that if a tenant assigns the Lease, the outgoing tenant enters into an “authorised guarantee agreement” in which the outgoing tenant guarantees the performance of the obligations of the incoming tenant.

For assignments and subletting, the landlord’s consent will need to be documented by a “licence to assign” or a “licence to sublet”.

Alterations

It is usual for a Lease to impose restrictions on a tenant making alterations. Often, structural or external alterations are forbidden, but internal, non-structural alterations are permitted, with the landlord’s consent.  

Repairs

The landlord will want to ensure that if the tenant damages the premises, the tenant repairs this damage before the end of the Term.  The longer the Term, the more repairing obligations there are likely to be.  Often, a photographic “schedule of condition” will be drawn up, which provides a record of the state of the premises at the commencement of the Term of the Lease. The Tenant’s repairing obligation in such a situation will be limited to the state in which the Property is in as evidenced by this schedule of condition.

Use

It is important for the tenant to ensure that any permitted use which is stated in the Lease is appropriate for their needs (present and foreseeable), and that if the tenant is likely in the future to require a change of use, it is easily achievable. As with assigning or subletting a Lease, a tenant will need to enter into a licence with the landlord, which formally documents the grant of the landlord’s consent in changing the use of the premises.

In the case of a unit in a Shopping Centre, the tenant may want to prevent the landlord from granting any other leases of neighbouring units for a competing business.

Remedies

If a tenant breaches any of the obligations under the Lease, the landlord will have a range of remedies, including damages (where the tenant will have to pay the landlord financial compensation), forfeiture (where the landlord can enter the premises and re-take possession of the premises), and injunction (where the landlord gets an order from the court to compel the tenant to comply with any obligations which you have not performed). Similarly, there will also be remedies available to a tenant whose landlord breaches their own obligations.

Registration and SDLT

If the term of the Lease is 7 years or longer, the tenant will need to register the Lease with the Land Registry, and pay a fee for this.

If the rent is above a certain threshold, the tenant will also have to pay Stamp Duty Land Tax to HMRC. A tenant should instruct a solicitor to deal with both these matters.

For more information about Olswang go to http://www.olswang.com/main.asp?sid=193

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