It's a big financial commitment taking on a business lease. Make sure it meets your needs and you understand all its implications before signing on the dotted line……

The guide 'A code of practice for commercial leases in England and Wales' can help landlords and tenants to negotiate fairer leases. But leases are complex and few people outside the property and legal worlds will understand all the details. So call in the professionals - your chartered surveyor and solilcitor.  

What is a lease?
A lease is a binding legal contract that sets out the terms and conditions of the tenancy agreement between landlord and tenant. It defines the rights and duties of both people. It is enforceable - you cannot simply walk away from a lease. The law also defines certain aspects of the relationship between landlords and tenants.

New or existing lease?
It is not always a simple matter of a tenant taking a lease direct from the property owner (the freeholder). Take the following situation:

• An investor owns the freehold of the building
• A tenant takes a lease from the freeholder
• A second tenant later takes on this lease from the original tenant, becoming the assignee and assuming the responsibilities of the original lease
• The assignee later grants a sub-lease over surplus parts of the building to a sub-tenant.

In practice the chain may be far more complex than this. Needless to say, nobody down the chain can grant a lease longer than their own.
As a prospective tenant, you might be negotiating a new lease with the freeholder. On the other hand you might be entering the chain lower down and taking an assignment of an existing lease, or perhaps a sub-lease. With the new lease you can negotiate the terms to match your needs (though you will not necessarily get everything you want!). With an existing lease you will be bound by existing conditions and you have decide before signing whether you can live with these or not.

Is there such a thing as a standard lease?
No. It is up to the landlord and tenant to agree the terms. However, there are certain legal matters that will crop up in almost all leases and the Law Society produces templates leases for various types of tenancy.

The landlord and their advisers will probably have a clear idea of the form of lease they would like and the main conditions. You, as prospective tenant, may want to negotiate for changes on specific points. Your bargaining position will depend on several things, including the state of the property market at the time. This is where your chartered surveyor's expertise will be invaluable.

How long should a lease be?
Again, this is up to you to negotiate. Longer leases often have terms allowing for the rent to be adjusted at intervals of, say, three to five years. The wording of this rent review clause is very important
However, the length of the lease does not necessarily limit how long you stay in the property. Most business tenants have security of tenure under the Landlord and Tenant Act 1954, which gives them the right to have a new lease when the existing lease ends, subject to certain exceptions.

Do I always have security of tenure?
Not all leases include this security. However, to be valid the county court has to approve its exclusion when the lease is prepared. You must be extremely careful giving up your security of tenure. And even if your tenancy is protected under the Act, you are not guaranteed a new lease when the current one ends. The landlord might oppose it for some legitimate reason, for example, because they want to move in themselves or redevelop the building. Or they claim you had consistently breached the terms of the old lease. For more information on security of tenure and lease renewals.

May I make changes to the building?
You probably won't be allowed to make any structural changes or building extensions but may be able to make internal ones - such as partitioning - with the landlord's consent. But you may have to remove any changes you have made internally and return the property to their original state at the end of the lease.

What about redecoration or repairs?
It's usually your responsibility to look after inside decoration and repairs and possibly the outside ones too. So if you are planning to lease a building that is already in disrepair get your chartered surveyor to survey the property first. They will let you know how much needs doing. Plus, towards the end of the lease the landlord may serve a 'schedule of dilapidations' notice on you to carry out any repairs listed in the lease. Since there is often argument over this point, your survey safeguards against this and again professional advice is essential .

Who insures the property?
Normally, you pay the premiums in one form or another, even if your landlord arranges the insurance. Most tenants will also want to insure against disruption and loss of profits should the building become unusable following a fire or other accident.

Am I restricted in my use of the building?
You will inevitably be subject to some limits under planning permission rules. You will not be able to use a high street shop as an engineering works! The lease may also impose further limits - to keep a balance of tenants in a shopping centre, for example. A lease with strict use conditions may be difficult to assign.

How is the rent set at the start?
The landlord, you and your advisers agree the rent before the lease is signed. However, you can review this at intervals. The expertise and market knowledge of your chartered surveyor is vital here, as they can advise you on what figure is reasonable. And sometimes it may be possible to negotiate some form of rent-free period at the beginning of a lease.

But you cannot review the rent by itself without considering the other terms of lease. You should, for example, expect to pay more if the landlord takes responsibility for repairs than you would do if you were responsible for them.

Will the landlord need a guarantee for the rent?
If your business is a very young or small one, the landlord may ask for some kind of guarantee for the rent and the other terms of the lease. If your landlord asks you for a personal guarantee, be careful. If your company goes bust, the landlord could have a claim on your home and other personal belongings. You also need to make sure any guarantees would end if the lease was then assigned.

What happens at the rent review?
Most leases include a clause of rent reviews in the future. This is usually every three to five years during the length of the lease, possibly in an 'upward only' direction. For a guide to rent reviews see either the publication 'A code of practice for commercial leases in England and Wales'. However, following cross-industry agreement, landlords have been recommended to offer tenants alternatives to upward only reviews. Your chartered surveyor can advise you on the implications of the landlord's proposed rent reviews and whether there may be scope for negotiation.

How are landlord and tenant disputes resolved?
Ideally, by discussion and negotiation. But you can't always avoid serious differences, particularly on issues like market rent levels at the review point. So leases normally say in advance what happens when disagreements occur on certain key points.

Without other terms, the ultimate recourse is to the court - both time and money consuming. But the lease may also say that disputes can be referred to an arbitrator or to an independent expert.

What are service charges?
If your business is in part of a larger building, the landlord may charge you part of the cost for the services they supply to the whole building: maintenance of common parts, decoration and maintenance for the outside of the building and the like. This is the 'service charge'. You need to understand how these charges are calculated and how much they are before signing the lease.

Who pays business rates?
You as the tenant pay the business rates. Occasionally, however, the landlord will pay and pass on the cost to the tenant, perhaps in the service charge. The lease should make clear where the responsibility lies.

Can I escape from a lease if my property needs change?
Yes you can either 'assign' the lease to another tenant who takes over responsibility for paying rent to the landlord. Or 'sub-let' to another tenant, from whom you in turn collect rent. However, your lease will probably limit or impose conditions on either of these. You need to understand these limits fully before you sign the lease.

Some leases include a 'break clause', which gives the landlord or you (or both) the right to walk away from the lease at a specific point. For example, you might sign a 15 year lease but with the option to break the lease after 10 years. There might or might not be a penalty for this - again check the details of the lease.

Assignment and sub-letting terms can effect your future flexibility. Make sure your chartered surveyor or solicitor explains exactly what you are being asked to agree to, and its possible implications (see the section sales, assignments and sub-letting).

Am I still responsible after escaping from a lease?
Before 1996, if you signed a lease you stayed ultimately responsible for paying the rent and following the other terms until it ended. Even if you passed the lease to somebody else, who in turn might pass it on. This was known as 'privity of contract'. It meant the landlord could come back to you, perhaps many years later, to pay the rent and fulfil the other terms of the lease if one of the next tenants down the line went bust.

After 1 January 1996, 'privity of contract' as it applied to the tenant ended. However, most landlords will ask you, as tenant, to sign an 'authorised guarantee agreement'. This means you remain responsible for the lease if the person you passed it to defaults. But you are not responsible if following tenants default. But remember, if you take on a lease that was originally begun before 1996, the 'privity of contract' still applies.

Occupation under license
Young and start-up businesses need every spare penny to plough into the business plan. So rather than take out a lease on a property why not consider occupying your premises under a licence?

Property owners sometimes find it convenient to grant a licence, partly because the occupier will not qualify for 'security of tenure'. Licences are usually much shorter and do not need the same level of financial commitment.

But licences need to be drawn up very carefully. Otherwise the law might read them as a lease. So it is vital to take advice from a solicitor and a chartered surveyor before signing a licence, either as occupier or licensor.

What is a licence?
In this context a licence is technically a 'licence to occupy'. The 'licensee' - the business that occupies space under a licence - does not have a tenancy so cannot be described as a tenant. Nor do they pay rent. Technically, the payment it makes for the use of the space is a 'licence fee'. A licence needs to be written carefully so it does not become a lease and therefore come under the Landlord and Tenant Act 1954.

What are typical terms for a licence?
These vary greatly with your circumstances. The licence fee (the equivalent of rent) might be payable monthly in advance or even weekly. The 'licensor' (the equivalent of the landlord) may want the occupier to leave after one month's notice. The occupier may also be able to give one month's quitting notice. Various services may be provided as part of the licence arrangement.

What are the advantages?
If you are without much financial backing you may find it easier to get a licence than a lease. Usually, you need to pay a deposit equivalent to one month's licence fee, plus one month's licence fee in advance. If you take a licence you will also find it much simpler and cheaper to get out if your business plans do not work out and you need to leave.

What are the drawbacks?

• As occupier you have no 'security of tenure'
• You might lose your premises at quite short notice. So it can be risky to invest in decorating or furnishing the space to fit your needs
• You are at the mercy of the licensor. Especially if they decide you must sign a full lease to continue using the space
• You may also find the licensor has access to the premises you occupy at any time

Because a licence appears simpler than a lease there may be a temptation to ignore the usual precautions. Do not grant or accept a licence without consulting your solicitor and chartered surveyor.

What sorts of properties are available under licence?
It varies a great deal. Old multi-storey warehouse buildings are sometimes refurbished as small office units or even as individual rooms that might be available under a licence. Older industrial buildings - 'sheds' - are sometimes occupied under licence, as are seasonal shops. Regional development agencies may make 'starter' office units available under licence and perhaps provide communal photocopiers, secretarial assistance and the like.

Some businesses, which own or lease the buildings they occupy, find themselves with surplus space and often make sections of the building or individual rooms available under licence.

Lease renewals
If you need to renew the lease on your business property don't panic. It might end up saving you money.

With the right kind of planning, advice and professional help you may be able to renew the lease with better terms or move to more suitable premises. Luckily the law usually gives security of tenure to business tenants (there are exceptions). But if you want a new lease there are vital steps you must take quickly. Delays can be fatal - you might find you've lost your premises.

Remember, it's never too early to plan ahead, begin at least 18 months before the end of your lease.

This guide is based on the law and practice in England and Wales. Different procedures apply in Scotland and Northern Ireland.

What should I do first?
Think about your business objectives and prepare a plan of your property needs - short and long term. Ask yourself some key questions:

• Are your present premises too big or too small?
• Are they an asset to the business or a burden?
• Do you want the security of a long lease or the flexibility of a shorter one?
• Would it make sense to move to another building?
• Would you face a big bill for repairs if you did so?

Your chartered surveyor will be able to help you in working out your property strategy.

What are my rights as an existing tenant?
Most business tenancies in England and Wales are protected by the Landlord & Tenant Act 1954. The Act provides 'security of tenure'. As long as the business remains in the premises and follows all the correct legal procedures, you have a right to apply to a court for a new tenancy. The landlord is allowed to oppose your application in some circumstances. If you cannot agree with the landlord, the court will decide whether you should be offered a new lease and on what terms.

Can the landlord refuse to grant a new lease?
The usual justifications for refusing a new lease are:

• The tenant is not in the premises for the purposes of their business
• The tenant does not follow the correct legal procedures
• The court upholds the landlord's objection to a new lease, usually because the landlord wants the property for their own use to redevelop it (so you might be entitled to compensation for disturbance)
• The tenant has seriously breached the terms of the current lease
• A court order agreed at the start of the lease that there would be no security of tenure.

What are the legal procedures for a new lease?
Mistakes or delays can be costly. If you have security of tenure, and wish to protect it, you must serve certain formal notices and respond to others within stated time limits. Don't go it alone. Talk to your solicitor and bring in a chartered surveyor when it comes to getting a new lease on terms that suit you.

It's important to know that lease renewal involves two separate processes, which work in tandem:

• Application to the court to protect your legal right to security of tenure
• Application to (and negotiation with) your landlord to secure a new lease.

You must apply to the court whether or not you think your landlord will be happy to grant you a new lease on acceptable terms. This protects your legal position. If you then negotiate a lease that suits you with your landlord, the court does not need to get involved. But if things go wrong the court has the power to make the landlord grant you a new lease and to set the terms. It may also set the terms where the landlord offers a new lease but you cannot agree the detail.

The notices to be served to protect your position - and their timing - vary from case to case. So call in the professionals as soon as possible.

How are the terms of the new lease settled?
Usually by negotiation between you and your landlord, or your respective chartered surveyors. For information on commercial leases see the RICS commercial lease code of practice. Your chartered surveyor will advise you on your options and the terms you might realistically achieve. If any term cannot be agreed and you need to go to court, it will usually look at the terms of the old lease (apart from the figure for the rent payable) unless either party can show good reason to make a change.

When should I agree to give up security of tenure?
Only when you have no realistic choice, and only after taking professional advice. If your existing tenancy is not protected by the Act, you are in a weak position to argue for the new tenancy. Landlords may also be reluctant to give security of tenure for a sub-lease or where the lease involves only part of a property.

How is the new rent set?
The rent will usually be agreed at the current open market level for properties of a similar type in your area. Your chartered surveyor will advise on the likely level that can be agreed. As a general rule your landlord is not allowed to take into account any improvements to the premises you have made during the term of the lease or any extra value that might come from your trading from the premises.

What happens if there's no agreement before the old lease ends?
If your old lease is not protected by the Act (in other words, if you don't have security of tenure) your landlord can ask you to leave the premises. So negotiate a new lease as soon as possible. If you have security of tenure, following the end of your lease, you keep that building. This remains the position and would only be lost if a court decides your landlord has grounds for regaining possession.

What is the courts process?
If you have to go to court to resolve the dispute, both you and your landlord will usually appoint barristers to argue your case. An expert witness (usually your chartered surveyor) provides evidence of rental values. Resolving the dispute in court can be lengthy and expensive, so get advice from your solicitor and chartered surveyor on the likely costs and timescales.

Are there alternatives to the court for resolving disputes?
You can always refer your rent dispute to RICS' Dispute Resolution Service. The dispute is then overseen by either an 'arbitrator', 'independent expert' or 'mediator'.

If you and your landlord agree that a new lease is the way forward, but cannot agree the terms or a new rent, then there is the PACT scheme. This scheme provides an opportunity to have lease terms and rent decided by an arbitrator or independent expert appointed by RICS or the Law Society, rather than a judge in court. You can get more details of the PACT scheme from the RICS Dispute Resolution Service.

The new lease is agreed, now what?
Your solicitors will draw up a new lease setting out all the details. Ask your chartered surveyor to read the lease to make sure it properly reflects the agreement. Read the lease yourself too and ask your solicitor or chartered surveyor to explain any terms you don't understand or are not happy with. Do not sign before you fully understand and accept the terms.

Can I still change my mind?
You're not tied into the new lease until you sign it. If you are unhappy with the terms, or if you simply change your mind, you can leave the premises by asking your solicitors to give written notice to your landlord.

Further information
You'll get clear, impartial, expert advice on from an RICS member. They are highly qualified professionals with the letters MRICS or FRICS after their name, and are bound by strict codes of conduct. These are your guarantee of their skills, integrity and depth of experience. Whatever type of business property you have, chartered surveyors will provide you with the right advice.

Chartered surveyors are members of RICS one of the most respected, independent organisations for professionals in property, land, construction and related environmental issues worldwide.

For more on how RICS members can help you, and to 'find a surveyor' near you, contact RICS
T +44 (0)870 333 1600
contactrics@rics.org.
Lines are open Mon-Fri 0830 - 1730 .