Important considerations for corporate tenants

07 November 2023

Important considerations for corporate tenants when negotiating the heads of terms for commercial leases

Landlords and tenants are finding it more necessary to reinterpret the rights and obligations in new lease agreements due to the increased focus on sustainability and environmental responsibility. When negotiating Heads of Terms for new lease agreements or lease renewals for premises, below, we offer a non-exhaustive list of important considerations that should be at the top of the list.

Flexible working arrangements?

The COVID-19 epidemic has expedited the emergence of remote and flexible work arrangements, which has completely changed how companies use office space. It might be a good idea for tenants to bargain for more flexible lease terms, such as shorter terms or the ability to scale up or down in accordance with changing space requirements.

Should I be concerned about statutory developments?

Some tenants are reluctant to take on the risk of obligation for upgrades because of changes in legislation, especially in light of the trend towards shorter lease periods. Even while the new regulation calls for a wide range of potential improvements, the same basic concerns remain. For example, why should a short-term tenant be responsible for replacing cladding on a property that no longer meets statutory requirements? Certain tenants frequently deny accountability for repairs required by legislative modifications made during the lease period, arguing that the owner should bear responsibility for these.

What’s my responsibility for repairs?

Tenant occupiers of commercial buildings in the UK are often provided with full repairing and insuring (FRI) leases. This agreement transfers to the tenant nearly all obligations for building maintenance and even, in certain situations, whole reconstruction of the property. This arrangement made sense when leases were twenty-five to thirty years long, but times have changed, and it is now more typical to have a lease of five years or fewer. This begs the important question of why a tenant should be responsible for the possible cost of completely renovating the structural elements of a property, for instance, the roof of the building they rent?

A photographic schedule of condition should be included in the lease when there are ongoing concerns about the state of the property. If there are any flaws, this schedule should point them out and include a clause that says the tenant is not responsible for fixing them. A reduced overall repair obligation to guarantee that the premises do not deteriorate from the schedule-presented condition is even more desirable.

Furthermore, whenever a service charge is involved, it makes sense to think about capping the tenant’s liability annually.

What do I have to do about energy performance?

At present, it is illegal to rent out a property that doesn’t have a minimum E rating. Failure to comply with this regulation may result in fines ranging from £5,000 to £150,000 for each infraction, contingent on the rateable value of the property. Furthermore, the specifics of the infraction can be made public. Because of this, it’s crucial to talk about the property’s energy performance rating before entering it.

It’s important to note that tighter regulations are anticipated shortly; by April 1 2027, commercial properties are expected to have an EPC rating of at least C, and by 2030, it’s likely to be at least B.

Should alterations be removed at lease expiration?

It has long been customary for any modifications made by a tenant to be taken down and the property returned to its original state at the end of the lease. But there are sustainability and environmental issues with this practise. Is it appropriate for a tenant to remove and discard their fit-out, only for the next tenant to reinstall a completely new set of fittings, particularly in light of environmental, social, and governance (ESG) concerns?

Encouragement should be given to landlords to take a more cooperative and ecologically conscious stance, requiring strip-out only when absolutely necessary to get a new lease.

How simple is it for me to end the lease?

Although shorter lease terms are generally more flexible, even a five-year contract could be considered long. Tenants might be willing to pay a penalty in exchange for the beneficial break possibilities. It is typical for a break clause to require that the rent be paid on time. However, failure to make payments on time should only affect a pause if sufficient notice has been provided. Moreover, a tenant’s exercise of the break should not be contingent on landlord compliance; a landlord should not take advantage of small deteriorations to keep a tenant from breaking the lease.

Tenants may also want to sublease or assign. It is reasonable to anticipate that an assignee will provide proof of their capacity to fulfil the tenant’s responsibilities. Finally, it’s critical to be wary of Heads of Terms that state that the rent on a sublease cannot be less than the rent on the existing lease. If market rents are lower than this, subletting attempts may be seriously impeded.

Please contact the property team on 01254 828 300