Traditionally the preserve of the property agent or surveyor, the role of HoT negotiator for lease transactions is often now performed by the landlords and tenants themselves, with varying degrees of success. In the last few months I have been asked several times to provide input and comment for both landlords and tenants without any surveyor involvement at all. Colleagues have also had the same experience, so I thought it would be useful to provide a few pointers on the typical issues that might need to be addressed when dealing with HoT for a lease.
Typically, HoT for a lease will cover the main commercial points of agreement between a landlord and a tenant before they are passed on to a solicitor - who will then seek to translate the parties' intentions into the final form of lease that will govern the occupation of a property. Generally, the HoT would (at minimum) cover the points noted below.
Ideally reference should be made to a clear plan which should also take into account whether the property spans several floors. Consideration should also be given to any additional rights that may be required, including access or fire escape rights or rights to lead utilities or ventilation flues and also any parts that may be used in common with other properties like entrance halls, reception areas or staircases.
This is normally expressed as an annual figure. It's helpful to state whether VAT is payable in addition. It would also be useful to specify whether payments are to be made weekly, monthly or quarterly in advance and the dates upon which payments are to be made.
I touched on this in an earlier article. For leases of longer than 5 years, it would be normal to expect some sort of review of the level of rent. Parties will want to agree the method of review (whether an agreed stepped rent, a defined formula by reference to e.g. RPI or by an independent assessment of the open market rent at the time) and the frequency.
Rent Free or capital payment
Tenants may also want to give some thought to asking for a rent free period or capital payment (or premium), particularly if the tenant will be carrying out some initial fitting out works to a property which may mean that it is not able to operate or trade from the leased property during that time. A landlord is also more likely to grant such an incentive if the property has been vacant for a while or there has not been a great demand for the property.
Different tax treatments apply to rent free period and premium payments - and so both parties should seek advice on that aspect.
Landlords will also want to assess the financial covenant strength of their tenant. If the landlord is not satisfied, it might consider requesting a deposit, typically equivalent to 3 or 6 months rent which it can retain against the tenant's performance of the lease obligations. If the tenant entity is a company, then the landlord might ask for personal guarantees from the directors or other key members of that tenant company - or from any parent or other group company that has a stronger covenant.
The general trend in the market is for leases to be for a shorter duration than was common towards the end of the previous century. Although this can vary depending on the type of property, it is relatively rare now to see a lease that exceeds ten years in length and it is certainly increasingly common to see a break option in a lease allowing either party to terminate at a given point provided notice is given.
Consideration should be given to the length of notice required to exercise any break (to allow the landlord time to find a new tenant) and also whether it is appropriate that any payment is made by the tenant upon exercising the break.
Clearly the issue of who has the liability for repairing a property - and also the extent of that obligation - is an important one for both parties to know at the outset of the lease. Most landlords will start from the position that the tenant should be liable for all repairs - whether by doing the work itself or paying the landlord for the cost of the work. For more detail on how a tenant's liability can be limited please refer to my earlier article on the topic.
The parties will often want to consider the circumstances, if any, in which a tenant can transfer its interest in the lease, either by way of an assignation of the lease or by a sub-let. If the lease is silent, it's implied that the tenant can transfer its interest in the lease to anyone without requiring landlord's consent unless there is something particularly special about the tenant (called delictus personae) that would negate this implication.
Typically a balance will be struck to allow alienation with landlord's consent, but only to parties that are of good financial standing who are able to show they can fulfil the tenant's obligations. Permitted sub-leases will usually have to be closely aligned to the head lease.
This is by no means an exhaustive list of the types of issue that should be dealt with in well drafted HoT for a new lease but it should hopefully serve as a useful check list of the sorts of matters that should be covered. And just in case there are any property agents looking in, in the large majority of cases, it is always advisable to have a properly qualified professional to deal with these on your behalf!
If you would like to discuss these issues further, please contact us.