ALPHA

Browett Taylor

 

Commerical Leases

Overview

There are many contrasting differences in the procedures for the letting of commercial premises between England and those of France.

We detail below some of those issues which prospective tenants of commercial property should be aware of when acquiring property within England and Wales.

The Legislation

In England and Wales the Landlord and Tenant Act 1954 as amended by the Law of Property Act 1969 and the Business Tenancies (England & Wales) Order 2003 is the principal legislation which defines the rights and obligations of landlords and tenants of business premises. This legislation provides commercial lessees with a degree of security of tenure; it sets out the basis for determining the open market rental value on lease renewals and the basis of compensation if landlords seek possession for their own use, occupation or development on lease expiry.

Privity of Contract

In England and Wales the original parties to a lease can remain liable to each other for fulfilment of the terms of the lease throughout the term of the contract – regardless of any subsequent assignment of the lease – where the lease was granted prior to the 1st January 1996. This is known as the concept of privity of contract which, does not apply in the same ways to leases granted after 1st January 1996.

By virtue of the Landlord and Tenant Act 1988 landlords cannot unreasonably delay or withhold consent to applications for either assignment or sub letting of commercial premises where such transactions are permitted under lease.

Repairs

The usual obligation requiring a lessee to keep in good and substantial repair a commercial property effectively requires a lessee to put and keep such premises in repair – this can extend to include inherent defects (i.e. defects in design or construction). It should be appreciated that much will depend on the precise wording of the lease – but depending on that wording the obligation can even extend to require a lessee to rebuild and renew a property.

Service Charges

Until relatively recently lessees could only secure a rebate in respect of service charges (where a landlord has made an incorrect charge) for the year in which the challenge to the service charge was actually made – and not for previous years. Now, following the decision in Kleinwort Benson V Lincoln City Council lessees are able to pursue such claims under contract for up to 12 years.

Capital Allowances

Lessees should be aware of the availability for these tax allowances on commercial properties which can apply as follows:-

25% of the costs of plant and machinery – writing down allowance.

In addition, certain buildings, such as those in Enterprise Zones can attract 100% first year allowances.

Rent on Review and Leases Renewal

Rents on either rent review or lease renewal are generally based on open market value and outside of a limited number of shopping centres, turnover rents are not in favour within the UK.

The general practice is that on review rents are currently upwards only – dependent upon the lease provisions. On lease renewal the rent is geared to the open market value which can in certain instances lead to a reduction in the rent payable. The level of rents proposed by landlords are capable of challenge and reduction by negotiation or alternatively reference to other parties. In the case of rent reviews these disputes are normally settled either by reference to an arbitrator or an independent expert; in the case of lease renewals such disputes can be settled by reference to the Courts or formal arbitration proceedings.

Business Rates

These are a charge on commercial property assessed by the Valuation Office and levied by the local authority. The rateable value is based on the rental value to a hypothetical tenant assuming a tenancy from year to year which are currently based on values as at the 31st March 2003. Rateable Values are capable of appeal to a local Valuation Community Charge Tribunal and beyond this to the Lands Tribunal.

The last reassessment of rates took effect from the 1st April 2005 and unless an appeal has already been made, this is an aspect on which you should seek advice, in order to consider the possibility of a challenge to the rating assessment.

Other Taxation Aspects

In term of property taxation, stamp duty is payable on the grant of leases and rises significantly where the lease is for a terms in excess of 7, 35 and 100 years. Effective 1st December 2003 it is payable on the amortised rent payable under a commercial lease (subject to certain restrictions and regulations). It can also apply on disposals and surrenders.

Value Added Tax is also payable on commercial rents and service charges but only where a landlord has elected to waive exemption from VAT. The trend is that an increasing proportion of commercial property is subject to such an election – the advantage to occupiers being that where they are liable for service charges they will be able to recover the VAT element payable within any service charge (subject to the lessee having a separate VAT status).

For organisations active in the financial sector such as banks and insurance companies, whose activities do not attract VAT, this can of course be a disadvantage, given their inability to recover VAT.

The above guidance relates to practice in England and Wales. Please note this guidance is no substitute for professional advice and before taking action, proper formal advice must be taken on any matter.

Next step

If you would like to discuss any aspect of the service we can provide, please contact one of the team either:-

Richard Hutt TD BSc MBA Dip Prop Invest FRICS
DDI: +44 (0) 20 7290 6941
richard.hutt@alphaproperty.co.uk

Robert Dickson MCIWEM
DDI: +44 (0) 20 7290 6946
bob.dickson@alphaproperty.co.uk

Evette Phillips
DDI: +44 (0) 20 7290 6944
eve.phillips@alphaproperty.co.uk

Please note this information should not be applied to any particular set of facts without seeking legal, accounting and a surveyor’s advice.