Leases
Never sign a lease without getting a lawyer to read it first.
The purpose of a well-drafted lease is to transfer to the tenant all the obligations of ownership – to clean, maintain, repair - even completely rebuild - the property, with precious few of the advantages. Indeed, as was seen in the 2008-09 crisis, so crushing can these obligations be that sometimes the only leverage the tenant has is to threaten insolvency.
What are the traps which the tenant should look out for? They are:
- The Repairing Covenant.
- The Service Charge.
- The Break Clause.
- The Rent Review Clause.
Before you sign your lease, take a highlighter to these clauses. Take the marked copy to your solicitor and ask him to advise on what would happen if any of these clauses were triggered.
The Repairing Covenant
The function of the lease is to get the tenant to carry out the repairs – even when the items of disrepair – eg a leaking roof – happened long before the tenant’s lease. The tenant’s complaint that ‘it was like that when I moved in’ cuts no ice: if the lease says the tenant must ‘keep the demised premises in good repair’ then he must. To counter this requires an amendment along the following lines: ‘Save that the tenant shall not be liable for any defect or damage occurring before the signing of the lease.’
Service Charges
Originally, a service charge clause allowed the landlord to recoup the cost of services supplied. It did not allow him to make a profit. However, over time imaginative draftsmen have transformed this clause into a cash cow. The definition of ‘services’ may now include almost anything (including capital improvements to the building). To counter this one might consider: (a) seeking a statement of the last 2 years’ service charges. (b) proposing an amendment: ‘Save that the total service charge payable by T shall be capped at £x’ or ‘shall be capped at 105% of the last 12 months’ applicable service charges.’
The Break Clause
The break clause is there to tie the tenant to the lease and make leaving difficult. It is in L’s interest for there to be only a few break dates and to have them well in the future. The Tenant wants the opposite. This is best resolved by having the same term for both L and T. For example: ‘Either party may terminate the lease by giving 6 months’ notice at any time after 6/12/18 months of signing’.
The Rent Review
The Rent Review clause will be drafted so that it can only go up. The increase will be stated to be in line with the Retail Price Index (which tends to be 2% higher than the Consumer Price Index) and historically the RPI has never been negative, whereas the CPI (after the 2008 crash) measured negative inflation. So, counter this with a proposal that the increase be capped at a % of CPI over the last 12 months.
If you are about to sign a lease and want advice on its consequences, by all means, call me.