Negotiating the Commercial Lease – Dealing with Landlords and Tenants Needs

Leasing of commercial property for business is very common in Scotland. Rather than buy a property from which to operate, businesses sometime have a policy of leasing their premises.

When an owner of a commercial property decides to lease it to a tenant, they both need to enter into a lease. This means that the terms of the lease need to be negotiated between the parties. Clearly, the aim of the parties is that the tenant enjoys peaceable occupation of the premises whilst the landlord enjoys the rent. However, to achieve this, the landlord and tenant need to negotiate a commercial lease. In doing so, it very quickly becomes clear that whilst the overall aim might be the same, each of their interests come into conflict.

There is almost always a route to compromise and to achieve this compromise, the solicitors involved need to properly advise their clients. Importantly, the same solicitor should never represent both the landlord and tenant. To avoid a conflict of interest, the landlord and tenant should each have their own solicitor.

Also, despite the efforts of some to produce a “standard” commercial lease, the best efforts can only manage to provide a framework which then must be customised to address the specific needs of the landlord and the tenant.

Also, long gone are the days when the tenant would simply accept the lease terms the landlord dictated. Landlords and tenants now negotiate the commercial lease to achieve the maximum benefit for each that can be derived from the lease.

To understand the competing needs, it is important to look at these from the aspect of the landlord and the tenant.

Understanding the needs of the landlord

The landlord owns the premises to be leased. One of the key elements of a commercial lease, from a landlord’s perspective, is to ensure that the tenant properly maintains the property for the duration of the lease and returns it to the landlord in substantially the same condition when the lease ends.

The commercial lease negotiation usually starts with the landlord’s solicitor presenting the lease along with an offer to lease to the tenant’s solicitor. The lease will usually contain conditions favourable to the landlord, including the requirement for the tenant to maintain the premises at no less a condition they are in at the commencement date of the lease throughout the duration of the lease.

In addition, this type of lease will impose repairing and insuring obligations on the tenant. That means the tenant not only must maintain the premises but also pay the landlord’s insurance premiums for the insurance cover of the premises.

What additional conditions should a landlord include in the lease?

In addition to detailed clauses relating to the condition of the premises, the lease will include clauses relating to the use of the premises, the duration of the lease and the rent, how rent reviews are dealt with, what happens should the tenant default and the lease needs to be terminated. It will also deal with dilapidations should the tenant leave the premises in a worse condition than it was in when they first entered into the lease.

There will also be conditions relating to alterations to the premises and to assignation by the tenant and whether the tenant is able to sub-lease the premises. The tenant will also be required to comply with local and public authority regulations and to send any notices received to the landlord – and to deal with any notices that are served.

The result, from the landlord’s perspective, is to have a lease that preserves the value of the asset, transferring as much risk as possible to the tenant whilst collecting the ongoing and increasing rent through the duration of the lease.

Understanding the needs of the tenant

Perhaps, understanding the needs of the tenant is the flip side of the needs of the landlord. The tenant and the tenant’s solicitor usually receive an offer to lease along with the commercial lease. In many cases, the landlord might indicate that the terms of the lease are “non-negotiable”. In a very tight market, the landlord might get away with this position. However, the tenant is usually able to negotiate the lease to ensure it is as favourable to the tenant as possible.

One of the key battlegrounds for tenants when they vacate the premises is their condition. The lease usually states that the condition shall be no worse than the condition at the commencement of the lease. But what does that really mean?

Dealing with the condition of the premises

The question of condition can be very subjective when it is taken in isolation. The best way to deal with this from a tenant’s perspective is to have a Schedule of Condition prepared, supported by photographs of the premises pointing out lack or wants of repair prior to the commencement of the lease. By agreeing a Schedule of Condition prior to the commencement of the lease, the tenant can proceed in the knowledge that the repair and maintenance obligations are based on the actual condition of the premises before the lease commenced. Having a Schedule of Condition takes the subjective views of the landlord and tenant out of the picture.

How to cater for alterations

Another potential issue is what happens with alterations the tenant might wish to carry out to the property to ensure it is suitable for its use. There will be the usual requirement for landlord’s consent before the alterations can be carried out, but it is critical to decide what should happen regarding those alterations at the termination of the lease. It may be expensive to reinstate the premises to their pre-alteration state so the tenant’s solicitor might insist that the alterations stay at the end of the lease where the landlord has consented to them being carried out in the first place.

The tenant’s solicitor is charged with explaining the terms of the lease to the tenant and pointing out areas of concern. The tenant must consider any recommendations made by its solicitor to ensure that any modified lease terms are as favourable as possible.

Who has the strongest hand?

At the end of the day, the weight of negotiation will fall on the side of who has the strongest covenant. In other words, if there are many similar commercial properties available in the locality, all of which would suit the tenant’s needs in some way, the tenant might hold a stronger negotiating hand. On the other hand, if commercial property is scarce, the landlord might struggle to attract a tenant without compromising on some of the conditions in the lease.

What are the next steps?

We act for both landlords and tenants in commercial lease transactions. We would stress, however, that we will not act for the landlord and tenant in the same lease. That would undoubtedly lead to a conflict of interest.

Because we act for both landlords and tenants, we are familiar with the arguments advanced for either when dealing with the negotiations. This means we can advise you on what you might expect from the other party’s solicitor when the negotiation of the lease commences.

If you are a landlord considering leasing a commercial property and would like to discuss the structure and conditions of lease or if you are a tenant who wishes to enter into a commercial lease, please do not hesitate to contact us.