Letting a commercial premises

There are four main types of agreement which should be considered by commercial landlords when letting out premises. We have briefly described them below in the order of length of time covered – shortest to longest.

Periodic Tenancy
This is a tenancy agreement which is not outlined or enforced by a contract or lease. The tenant occupies the property for a fixed period of time, usually parallel to payment of the rent;  i.e. if rent is paid monthly, then the period is usually one month.

Two situations can cause this form of agreement to arise:

  • The tenant is in occupation and pays rent for a lengthy period without being under a formal letting agreement.
  • The tenant is in occupation and pays rent. The terms of the lease agree ‘subject to contract or lease’, but the lease has not yet begun.

This is more common in residential property, but can occur in the handling of commercial buildings. The notice which must be served by either party to end this agreement will usually be one ‘period’ – in the above example this would be one month.

Tenancy at Will
This form of tenancy allows for flexible letting arrangements where a commercial premises needs to be let in the short term. Its primary use is for short periods, but no actual period is defined so its length is effectively indefinite.

It can be intentionally agreed, or arise by implication when a tenant’s lease expires, but they are allowed to continue occupancy.

To end a tenancy at will, either party must serve notice on the other. The length of this notice is outlined in the agreement and is usually between 1 and six months. Throughout the period, the landlord retains full and exclusive ownership and access.

It is advised that when granting a tenancy at will, one should avoid inadvertently creating a periodic tenancy (described above) which could necessitate a longer notice period (at least one period of the tenancy will have to be given as ‘notice’).

Licence to Occupy
This is a particularly useful form of agreement when the landlord and the tenant need to occupy the same premises. Unlike a commercial lease, this does not give the tenant exclusive right of possession to the property. The landlord can come and go as he or she pleases.

It does, however, mean that there is no leasehold interest for the tenant; i.e. the lease is not a physical asset and cannot be traded or mortgaged as one.

Overall, it is shorter and simpler than a commercial lease.

Commercial Lease
The longest, most permanent and most complex of the options, this is generally advised as being suitable for letting premises for a period of 6 months to 25 years.

Its most distinguishing feature is that it gives the owner of the lease exclusive possession rights over the property. The landlord may not come and go as he or she pleases, unless in specific situations stipulated under the leasehold agreement.

Unlike the licence to occupy, therefore, it is not suitable where the landlord must co-occupy the space.

Commercial leases must be for a fixed period, but they can run on after the lease is ended under a periodic tenancy or tenancy at will agreement. This is by far the most common type of commercial tenancy agreement.

In summary, professional advice should always be taken by a landlord or a tenant.  A
Solicitor and a Chartered Surveyor should nearly always be appointed to advise on the legal, commercial and physical issues of a tenancy.  The rights and responsibilities of a tenancy can vary greatly. 

Considerations include:

  • Whether to opt in or out of the Landlord and Tenant Acts?
  • What are the rights of renewal or purchase?
  • What are the contractual conditions that need to be met at the end of the tenancy?
  • Has a schedule of condition been carried out?
  • What are the rent review implications?

 These and many other aspects need to be considered prior to the commencement of the tenancy to protect the landlord and to prevent a potential nightmare for the tenant. 

05-12-11

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