Taking on a lease requires careful negotiation to ensure that a charity receives what is expected, whilst ensuring no hidden costs are incurred, or mistakenly agreed. Unfavourable terms can be buried in the often dense drafting of leases.
A few of the areas a charity will need to consider are set out below:
When entering into a lease a charity tenant needs to consider any clauses which place an obligation on the tenant to keep the property in repair. The obligation itself is two-fold as the tenant will need to put right any disrepair existing at the commencement of the lease, and keep the property in good condition throughout the lease. There are a variety of ways a repair clause can be amended to ensure it is proportionate.
Liabilities under the repair clause should not be overlooked. Significant costs can be incurred to put the property in a state of repair, which may be well beyond any budget anticipated by the charity.
Charities will often enter into a lease of only part of a building. When this is the case, landlords will seek to recover their costs of maintaining the rest of the building through a service charge.
In the first instance, a charity will need to establish how much the service charge is likely to be, check the services that the landlord will be providing, and ensure that there is a clear obligation on the landlord to provide them. A service charge needs to be fair and reasonable, and serious thought needs to be given to limiting the service charge (especially where there is a short lease).
At the outset when agreeing the initial level of rent, a charity should be confident that they are not paying above the market level for what they are receiving. When a rent review is included in a lease, the charity needs to ensure that this principle continues.
Most leases of commercial premises tend to include a provision allowing rent to change over time (whether by reference to an index, market value or other method). If the rent review is not drafted carefully then either the amount agreed, or the process for carrying out the rent review, can be detrimental to the charity. Disputes are then likely to arise which can be onerous and costly to resolve. The frequency of review, type of review, assumptions to be made, and procedure for dispute, are all considerations that need to be carefully drafted in the lease.
It is normally the case that a permitted use clause will be included in a lease, stating that a property can only be used for a certain purpose. The charity taking on the lease will need to think carefully about what their activities are, what they will use the property for, and whether the use is likely to change in the future. Any permitted use provisions should be reviewed closely to ensure they will enable the charity to use the property as intended. The drafting of the clause should not frustrate these intentions as landlords can take action for breach of permitted use.
The position at a planning level should also be considered in advance of signing up to a lease. Leases usually require the tenant to ensure that the permitted use is authorised for planning purposes. If it is not, an application for planning permission is required. If permission is not granted, then the charity will be taking on the risk that the local planning authority could prohibit the charity from using the premises. The charity would still be liable to the landlord to pay rent, as well as for any other obligations under the lease.
A break clause in a lease provides a charity flexibility. If such a clause is not included the charity would have to 'assign' the lease (i.e. transfer it to another party who would be willing to become the tenant) which tends to be subject to the consent of the landlord, and can be costly and time consuming.
However, failure to comply with the specific terms of a break clause can also be costly. It is imperative that charity tenants consider how they can minimise the scope for making a mistake. Depending on the specific facts, a break clause could take effect on a fixed date, it could be a rolling break clause, or the clause could even be conditional on notification of loss of future funding. Whatever type of break clause is included; it needs to be carefully negotiated with the landlord to ensure that the charity will not breach the clause in the future.
Want to hear more?
This gives an overview of things to consider when taking on a lease. You can hear more on this topic at our seminar on Taking a lease: a guide to negotiation for charity tenants on 18 April 2018.