Tag: commercial property

Commercial property considerations for damage by insured risks

November 10, 2021, By
insured-risks-comm-prop

Our Commercial Property team explains considerations for damage by insured risks.

Commercial landlords rely on insurance to cover the cost of repairing damage to their investment property beyond normal wear and tear, and business tenants expect a rent holiday if they cannot use their premises.

Many commercial landlords and tenants, whose premises were forced to close because of Covid-19, had an unwelcome surprise when they found themselves with no loss of rent insurance cover and no tenant rent cesser.

The insurance provisions in a lease set out important principles about who pays for insurance and what happens if the property is damaged.  What the landlord and tenant agree at the outset can make a big difference when it comes to getting the building reinstated, so it pays to get good advice on what to expect.

‘If disaster strikes, the last thing the landlord and tenant want is a dispute about whether the damage is covered by insurance and whose job it is to put it right’ says Hannah Al-Shaghana, Commercial Property Partner. ‘The insurance clauses in a lease can catch people out if they have not been properly explained.’

What is covered and who insures?

In a typical full repairing and insuring (FRI) lease, the landlord will be obliged to insure the property for its full reinstatement value against a list of insured risks.  These are usually standard risks commonly covered in the UK insurance market, including things like fire, explosion, storms, and earthquakes.

The insurance may be subject to an excess and some risks may be expressly excluded. For instance, flood and terrorism are the risks most often mentioned in this context, although in most places, they can be insured. The key thing is to make sure that the obligations in the lease match the actual insurance policy for the property, otherwise the landlord could be in breach.

The landlord will also insure for ‘loss of rent’ for an agreed period, typically three years. This will allow the tenant a rent holiday (or ‘cesser’) if the property is unusable after damage by an insured risk.

Who pays for insurance?

The tenant will pay the landlord’s insurance costs, including the premiums for both building insurance and loss of rent cover, any excesses, and the cost of an annual valuation.  This is usually defined in the lease as ‘insurance rent’ and is paid in addition to the main rent for the property.

Impact on the tenant’s repairing obligation

The tenant is generally required to repair the property included in the lease, but not if there is damage by an insured risk.  This is the fair position because the damage should be covered by the insurance policy for which the tenant pays the premium.  However, most leases will add an exception to this rule for situations where the insurers have refused to pay in the event that the tenant has breached the terms of the policy or the Tenant has caused the damage.

There are ways to deal with this, for example by providing for the tenant to reimburse the landlord for any amount the insurers are withholding.  The landlord’s insurance policy may also have a non-invalidation clause, which stops the policy being affected by the tenant’s actions.  Your solicitor will be able to advise you on the best way to deal with these in the lease.

Dealing with damage by an insured risk

If there has been damage by an insured risk, under a full repairing and insuring lease, the landlord must claim under the insurance policy and carry out the necessary repairs.  The lease will usually set out a timescale within which the building must be reinstated, with an obligation on the landlord to use reasonable endeavours to make sure this is achieved.

The landlord will often want some flexibility to make changes to the building when it is reinstated, but this can be controversial with tenants so it is an area where the parties need good advice on the right drafting.

Tenants should understand that even if they cannot occupy and trade from the property because it has been damaged, the lease will not automatically end and the rent is, as a matter of law, still due.  In practice, the landlord will rely on the loss of rent insurance, so the lease will allow the tenant a rent cesser for an agreed maximum period.  It is vital to check the detail of the loss of rent cover because it will probably apply only if there has been physical damage to the property.

The loss of rent period and timescale for reinstatement should reflect the time it is likely to take to restore the building.  Neither side will want the reinstatement period to drag on but their commercial perspectives may differ.  The tenant will want either to get the business up and running again or be able to move elsewhere.  The landlord will not want to be left with an unusable building, but might see this as a chance to redevelop the site.

To create some certainty, the lease will usually state that if the property has not been reinstated by the end of the loss of rent period, there will be a right to end the lease.  This is sometimes just for the landlord and sometimes for both parties, so it is important to ensure your solicitor  negotiates the best terms for you.

How we can help

The insurance provisions in the lease should reflect the degree of flexibility the parties want if the building is damaged, and how long they are willing to wait for damage to be repaired.  Good advice is essential to help landlords and tenants avoid the extra disruption of an insurance dispute over reinstatement.

For further information on managing damage by insured risks, please contact our commercial property solicitors on 0161 969 3131 or fill in our contact form and we’ll be in touch.

Obligations under a full repairing and insuring commercial lease

September 10, 2021, By
full repairing and insuring commercial lease

Keeping commercial property insured and in good repair is important for both landlords and tenants, but for different reasons. The tenant needs to be able to run a business from a well-maintained property.  The landlord needs to preserve the value of the property as an investment, at little or no net cost. The landlord achieves this by granting a full repairing and insuring lease, which passes liability for the costs of repair and insurance to the tenant.

There is still scope for disagreement about who is responsible for repairing specific parts of the property and to what standard. Both parties must seek legal advice before they enter into the lease and throughout the term, so they know what they are expected to maintain and how much it is likely to cost them.

Hannah explains;

‘A full repairing and insuring lease is the gold standard for a commercial landlord, but it doesn’t mean they can leave everything to the tenant and have no involvement over the state of the property throughout the lease,’ 

‘The landlord remains responsible for parts not let to the tenant and for arranging the insurance, so it really is important to understand what the lease says about those issues.’

What must the tenant maintain?

In a full repairing and insuring lease, the tenant must maintain the parts of the property demised to them in the lease.  Where the whole of a commercial building is let to one tenant, the tenant must maintain it all.

It can become more complex in a multi-let building, where leases will often include only internal parts, with the structure and common areas retained by the landlord.

In these circumstances, tenants are responsible for the parts let to them, and landlords are obliged to repair the rest (for example external landscaping, structural external parts of the building, parking areas and building security systems).  The landlord will attempt to recover as much of these costs as possible through the service charge.

The description of the premises in the lease is crucial; every item or structure referred to in the definition of premises will fall upon the tenant to keep in good repair.

Insurance

In principle, the landlord will insure the whole building and will recover the premium from the tenants.  If there is damage by an insured risk, tenants do not have to repair it, unless, of course, they have breached the terms of the building’s insurance policy.  Instead, the landlord will claim the policy and use the insurance money to fix the damage.

In practice there can be gaps in the cover, for example if it is not possible to get insurance against a particular risk.  This is unusual but, in the past, insurers have warned that they may withdraw cover for damage by terrorism and, in some areas, flood.

Many modern commercial leases now deal with uninsured damage (i.e. damage caused by a “risk” that is not covered under the insurance policy). In these scenarios, if damage is caused by an uninsured risk, one would not expect the tenant to repair the damage caused – but it is not always the case so it is something to look out for.

Standard of repair

A full repairing and insuring commercial lease will typically require the tenant to keep the property ‘in good and substantial repair’ or ‘in good and substantial repair and condition’.  If the property is not in good repair at the start of the lease, the tenant may have to bring it up to that state and then maintain it.

What counts as ‘good and substantial repair’ will depend on the nature, location and age of the property, and the tenant of a unit in a well-worn parade of shops would not be expected to bring it up to the standard of a unit in a brand-new shopping centre.  This flexible view of the standard of repair is helpful in one sense, but it does leave scope for argument.

An alternative approach

Where a property is in a poor state of repair at the outset and especially if the tenant is taking a short lease, the tenant’s solicitor may be able to negotiate a less onerous repairing obligation.

A common alternative is to agree a detailed schedule of condition, showing the state of repair at the start of the lease, and to limit the tenant’s obligation to keeping it in no worse a state than as shown in the schedule.

Occasionally, the landlord will accept that the tenant need only leave the premises clean and tidy (sometimes referred to as broom-swept), as long as the tenant has not actually caused any damage.

How we can help

Failure to repair causes problems for both landlord and tenant, especially at the end of the lease.  The landlord wants the property back in a lettable state and the tenant wants to leave without any unexpected expense.  An argument over repair could even prevent a tenant exercising a valuable break right.  Getting good legal advice at the outset will mean both parties know what to expect and will avoid a costly dispute.

For further information or guidance on agreeing on a full repairing and insuring commercial lease, contact our commercial property specialists.  Call us on 0161 969 3131 or fill in our contact form and one of the team will be in touch

Ten key negotiating points when taking a new commercial lease

June 3, 2021, By
negotiating a commercial lease

When a landlord and tenant try to settle the terms for a new commercial lease, each party will have clear objectives. The landlord wants a secure income stream and confidence that the property will be left in good condition at the end of the lease.  The tenant wants freedom to run the business without interference, to control costs as much as possible and to have some flexibility if their needs change. Negotiating a commercial lease effectively will recognise these different perspectives and find a balance between them.

‘As we start rebuilding our economy, there is a greater understanding that landlords and tenants need to work together,’ explains Hannah Al-Shaghana, Partner in our Commercial Property team. ‘Negotiating a commercial lease should not be a battle, and a good commercial property lawyer can help you secure the best deal.’

Elements of your lease negotiation

While there are many potential elements to consider when negotiating a commercial lease, here are ten key elements to remember.

1. Rent free periods

Landlords will often agree to a rent-free period at the start of a new lease as an incentive to the tenant. This could provide valuable breathing space to get established in new premises, especially if you need to spend money on fitting it out to the requirements of your business. In the current market, landlords are keen to secure good tenants, so it is well worth pushing for the longest rent-free period you can get.

2. Break clauses

Your new commercial lease will be granted for a fixed period and you will not be able to end it early unless you negotiate a break clause. You may be offered a one-off right to end the lease, for example at the end of a particular year of the term; or you may be able to get a rolling break right, which you can use at various points during the lease.

The landlord may wish to impose conditions that must be satisfied before you can break the lease, for example complying with all of your obligations up to the break date. Your solicitor will try to limit this to paying any rent due and leaving the property empty.

3. Repairing obligation

The usual starting point is that the tenant must keep the premises in good repair, so you would have to maintain it and fix any damage unless it was covered by the landlord’s insurance. If the premises are not in a great condition to start with or you are taking a very short lease, you could try to limit your obligation to keeping them in no worse state than they are in at present. You would then agree a schedule of condition with your landlord, with photographs and written details, which you can use as a benchmark later.

4. Rights to transfer the lease to someone else or to sublet the property

As with all aspects of your business, you will want as much flexibility as possible if you no longer want or need to occupy the premises. Most leases allow the tenant to transfer the lease to another business or to sub-let, but only with the landlord’s consent. By law, the landlord must act reasonably but they are allowed to impose conditions setting out when they may refuse consent.  Your solicitor will try to limit these to you being up to date with the rent, and the new tenant or subtenant being financially strong enough to take on the lease obligations. In some cases, you may need to enter into a statutory guarantee that if the new tenant does not meet the lease obligations, you will do so.

5. Rights to alter the property

You should make sure you have whatever rights you need to alter the property to suit your business. The lease will usually prohibit structural alterations, but you should ask for the right to make internal, non-structural alterations.  You may have to get landlord’s consent each time, although they may accept that consent is not necessary as long as you keep the landlord informed.

6. Obligations at the end of the lease

The landlord will want you to leave the property in good condition, so it can easily be re-let.  If you have made any alterations during the lease, the starting point is that you will have to remove them. It is worth discussing this when you are negotiating the lease, because you may be able to leave some things in place. This could save you and a future tenant money, while also reflecting a more sustainable approach by avoiding materials being wasted.

7. Indemnity clause

A lease is a contract and if you are in breach of your obligations, the landlord’s main remedy is to sue you for damages. This is time-consuming and expensive, so instead the landlord will want you to give an indemnity. In effect, this means you have to pay for losses and expenses the landlord suffers as a result of your breach of contract, without the landlord having to prove them in court. If the landlord insists on an indemnity, you should at least require the landlord to do all it can to minimise losses and give you an opportunity to put any breach right before you have to pay out.

8. Service charge

Most tenants have to contribute to the cost of services the landlord provides, on top of paying rent. The extent of the services will depend on the property. They typically include things like maintenance of areas not included in the lease, as well as heating, lighting and cleaning. If you take a unit in a much larger development, the services may be more extensive and cover things like public space, shared access roads and car parking.

Your solicitor should make sure there is a clear list of the services for which the landlord can charge and that any right to add extra ones is limited. It is also common to list things that must never be included in a service charge, like upgrades to the property that go beyond what is required to repair it. You should also ask for the right to challenge service charge items and inspect quotes and receipts.

9. Rent holidays

When the nation went into lockdown to stop the spread of Covid-19, many tenants were shocked to realise they still had to pay rent, even though it was illegal for them to trade from their premises.  As a result, many tenants now want their leases to provide for some sort of rent holiday if the business is forced to close under government instructions due to a future pandemic or for some other reason beyond the landlord and tenant’s control.  This is still new, so the terms actually offered by landlords depend on how keen they are to let a particular property and how much they value you as a potential tenant.

10. Access rights

Make sure the lease gives you any rights you need to access or use any areas that are not part of your premises – perhaps to put air conditioning or communication equipment on the roof or to use access routes and loading bays. At the same time, look out for any rights the landlord is reserving to come onto or encroach on the property let to you. Be particularly careful about rights to come in to inspect or carry out works and make sure that the lease says that any visits must be at reasonable times and on reasonable notice and that the landlord must minimise any disruption to your business.

How we can help

Lease negotiations can break down and become slow and expensive if either side is too rigid.  A good solicitor will help you work out the key commercial issues quickly and concentrate on negotiating a commercial lease which works in the best way for you, so you can get on with running a successful business from your new premises.

For further information, please contact our commercial property team. You can call us on 0161 969 3131 or fill in our contact form and one of the team will be in touch at a time that suits you.

Extending your Commercial Property

May 18, 2021, By Slater Heelis

If your business is expanding, you may have outgrown your current premises.  Before you start looking for a new site, it is worth investigating your existing premises and whether you could actually go about extending your commercial property instead.

Choosing to extend your current premises

Depending on the site and the nature of your building, you may be able to extend up, by adding new floors; down, by digging a basement; or out, by expanding the footprint of the current building. As well as complying with planning and building regulations, when it comes to expanding your commercial property, you must also consider any specific legal constraints that might affect your ability to extend.

‘Moving your business will cost you time and money, so it makes sense to get the best out of your existing site if there is room to grow. Issues like uncertain boundaries and neighbours’ rights of light can be traps for the unwary, so it pays to get the right legal advice at the outset.’  – Will Henson, Head of our Commercial Property team

Check what you own

Before you plan an extension, it is vital to check how much land you own, and on what basis.

If you own the freehold, you will generally have more flexibility about making changes. If the property is let as an investment, you must be careful not to interfere with your tenants’ use of it.  Your commercial property solicitor will be able to check the terms of your tenants’ leases to see what scope you have for making alterations to any existing buildings, and for causing short-term inconvenience to your tenants while works are carried out.  If you have a mortgage, you may also need the lender’s consent for any alterations or additions to the property.

If your property is leasehold, you will most likely require consent from your landlord for any alterations. Many leases have a complete ban on extensions and structural alterations. Your landlord may agree to your proposals, but you must get consent in the right way.

Getting this wrong could mean losing your lease altogether, so you should make sure your solicitor checks the lease and approaches the landlord for consent on your behalf. If you want to extend beyond the area already covered by your lease, your landlord may be willing to grant a supplemental lease of additional space. Again, it is important to get this properly documented.

Legal constraints to look out for

Land can be affected by a range of legal issues which could impact on plans for extending your commercial property. Some may be set in your title documents and others should be apparent from an inspection of the site.  For example:

  • The property may be subject to restrictive covenants which prohibit or restrict further building on the site or limit the size of any buildings. You might also need the approval of another landowner for any alterations or extensions. In recent years, the courts have taken a hard line on those who deliberately ignore restrictive covenants, awarding damages and in some cases ordering buildings to be taken down.
  • If your proposed extension could block or limit light to the windows of a neighbouring building, you may be able to change the design to avoid problems. If not, you may have to negotiate compensation or get your neighbours to release rights of light.  This is a complex area of law and you should make sure you get specialist advice.
  • It may seem obvious, but watch out for your boundaries, as they are not always clear. Land Registry title plans are usually not definitive, so if you are in any doubt, ask your solicitor to check your title documents. If you extend onto land you do not own, you will be trespassing, meaning you could face damages and possibly an injunction.
  • If you are planning to extend upwards or downwards, check whether you own the airspace above and the subsoil below the existing building. The usual rule is that ownership includes as much airspace and subsoil as necessary for the reasonable use of the land, but this may have been limited by specific exclusions when the land was sold or let in the past.
  • Others could already have rights over the area where you plan to extend. Telecoms operators may have rights to keep equipment on the roof; utility companies may have rights to run their services under parts of the site; and neighbours may have rights of way. If your extension would interfere with any of these, your solicitor will need to negotiate releases or compensation.

How we can help

A successful extension can bring huge benefits in how you use your commercial premises and could help you increase your returns.

Getting an expert commercial property solicitor involved early on will mean you know exactly what you own already and what restrictions you may need to overcome.

This will help you avoid wasting time and costs on unexpected disputes, so you can focus your efforts on putting together a scheme that really works for your business.

For further information and quality legal guidance on expanding your commercial property, please contact us on 0161 969 3131 or fill in our contact form and one of the team will be in touch.

Exiting your commercial lease – what are the options?

January 4, 2021, By

‘If your business is struggling and you lease your premises, it might be tempting to simply hand back the keys and walk away from your lease,’ says Will Henson, our Head of Commercial Property

‘However, ending your obligations under a lease is not that simple. While there are several ways to approach this, there are numerous pitfalls and the right negotiation tactics will be crucial, so you should speak to your solicitor as soon as possible.’

Will has outlined the options of exercising a break clause, surrendering a lease, an assignment or underletting.

Exercising a break clause

The first thing to check is whether your lease has a break clause, which will give you a right to end the lease early. Timing is critical, as most breaks can only be exercised on specific dates during the lease. You will have to serve written notice on the landlord, and the lease will set out how many months ahead of the break date this must be done.

There are lots of possible traps here, especially if the lease sets out detailed requirements for how and where your notice must be served. It is always safest to get your solicitor to check the lease and serve the notice on your behalf.

Once you have served your notice, you need to get ready to move out by the break date. Most break clauses have conditions attached, and if you do not satisfy them you may be stuck with your lease. Typical conditions include paying any rent and other money due to the landlord at the break date and leaving the property in a proper state of repair, removing all of your stock and equipment, and possibly undoing any alterations you made during the lease.

You should be careful not to leave anything in the property as this can be treated as a failure to vacate. Again, it is really worthwhile getting advice from your solicitor, because even a minor oversight in relation to break conditions can make the difference between ending your lease and remaining on the hook.

Surrendering a commercial lease

If you do not have a right to break, you will need to approach your landlord to negotiate ending your lease early by surrendering it. Your landlord is under no obligation to agree as empty premises are not an attractive prospect. However, you may find that they have another possible tenant lined up or they are planning a redevelopment or change of use. If so, it may suit the landlord to bring your lease to an end.

If you surrender your lease you will be released from any future obligations, but you are still liable for anything you were required to pay or do while the lease was in place.

This means that when negotiating a surrender, you should expect to reach some sort of agreement about outstanding payments and the cost of any repairs needed to the property. You may even have to pay an additional premium to compensate the landlord for loss of the rental income they expected.

Once you agree on the principle, a lease can be surrendered in two ways:

  • by a formal written agreement (a deed of surrender) between the landlord and tenant; or
  • by the landlord and tenant acting in a way that makes it clear they intend to treat the lease as at an end (a surrender by operation of law).

A surrender by operation of law can be attractive because it does not require any formal documents. This is where handing back the keys can be relevant – if you hand back the keys and move out, intending to surrender the lease, and your landlord accepts this, the lease will be treated as surrendered. It is still vital to agree the surrender with the landlord first because, even if you have returned the keys, your landlord can keep the lease in place by making it clear to you that they are not willing to accept your actions as a surrender.

Assignment or underletting

If you do not have a break clause and cannot agree a surrender, your other option is to look for someone else to take on the premises, either by taking on the lease itself or by taking an underlease.

Before you start looking, you should check with your solicitor whether or not your lease allows an assignment or underletting, as these are sometimes restricted.

Again, you will need to negotiate with the landlord. They will have to be reasonable in deciding whether to accept any new tenant or undertenant you propose, but they are entitled to impose specific requirements especially that anyone you propose will be able to pay the rent and carry out any other obligations in relation to the property.  If you want to assign or underlet to someone who plans to change the use of the premises, the landlord may be able to refuse on that basis.

How we can help

Getting out of a lease when the economy is shaky may not be easy but involving your solicitor early on will mean you can make the most of the options available.

For further information, please contact Will Henson and his colleagues in our Commercial Property team. You can call us on 0161 969 3131 or fill in our confidential contact form and one of the team will be in touch.