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Issues Arising in a Commercial Lease
Commercial leases are leases of premises for business use, and are governed by the Landlord and Tenant Acts. Each lease involves two parties: the landlord (or “lessor”) and the tenant (or “lessee”). A landlord may choose to lease a property as a commercial investment, whereas a tenant may choose to rent a property in order to carry out its business.
Therefore, the landlord will usually seek to reduce the risk of his investment by negotiating less onerous lease terms, whereas the tenant will seek to reduce his business overheads by doing the same. However, any negotiations are subject to the provisions of the Landlord and Tenant Acts, some of which are explained below.
Right of renewal
When an existing lease expires, the tenant has the right to extend the lease, known as the “right of renewal”. The landlord does not have a corresponding right (i.e. the landlord cannot force the tenant to continue renting the property). The law assumes that the tenant wishes to extend the lease; if neither party does anything, the lease will continue to run.
If the landlord wishes to terminate the lease, he must give the tenant between 6 and 12 months’ notice. He must specify the date that he wishes to terminate the lease, so long as this date is not before the lease is due to expire, and the grounds for termination. There are only limited grounds, including:
- failure to repair;
- persistent delays in paying rent; and
- substantial breaches of other lease obligations.
Therefore, it is advisable for any tenant to avoid undermining their right of renewal by fulfilling all of their obligations under the lease.
Prior to 1996, the tenant remained liable to fulfil particular obligations (or “covenants”) under the lease for the entire term, regardless of whether the lease was transferred (i.e. sold) to another party. However, for leases agreed after 1996, the tenant is no longer liable after transfer.
Therefore, if a new lease says nothing, the tenant is able to transfer the lease and free himself of any obligations under the lease. But this situation is not necessarily in the best interests of the landlord as, for example, the risk of his investment increases if a financially strong tenant transfers the lease to a company that is financially weak.
Hence, it is advisable for any landlord to prevent the tenant from transferring the lease, or require consent to do so, providing that consent is not be unreasonably withheld or delayed.
A sublease is a lease between the tenant and the subtenant. Subleasing is different to transferring a lease, as the original tenant remains liable to the landlord to pay rent and fulfil any other obligations under the lease.
Since the landlord will not necessarily have any direct relationship with the subtenant, it is crucial for the landlord to make sure that any sublease between the tenant and the subtenant does not undermine the lease between the landlord and the tenant. For example, the obligations under the sublease should not contradict those under the lease.
Hence, it is advisable for any landlord to prevent the tenant from subleasing, or require consent to do so, providing, again, that consent is not be unreasonably withheld or delayed.
If you would like legal advice about any of these issues, or any other issues relating to commercial lease disputes, please contact Salim Mansoor.