Commercial Leases
COMMERCIAL LEASES - SOME KEY TERMS AND RECENT DEVELOPMENTS
A huge variety of businesses, whether retail, industrial or commercial, occupy premises held under commercial leases. The commercial lease agreement is one of the most complicated agreements you will sign. They can often appear as cumbersome documents often of sixty pages or more weighted down with repetitious legalese. A lease should be drafted so that it is readable as well as reasonably practical so that anyone engaged in commercial business should be able to read, understand and find his way about it.
Broadly speaking, a tenant will be leasing either an entire building or part of a building in a multi let situation. In respect of the former, the lease should be drafted so as to include a full repairing covenant on behalf of the tenant. In respect of the latter the tenant's repairing obligation should be limited to the interior of the premises being leased where the landlord remains responsible for the structure of the whole building or for all areas not being leased. In this situation the lease should provide for the landlord to be fully reimbursed by all tenants for the costs incurred in maintaining the building. This may be facilitated through a service charge provision included in the lease.
Before any of the documentation is negotiated, a solicitor acting for the proposed tenant should carry out a due diligence of the proposed premises. This includes examining all title and planning documentation. Pre-lease enquiries and pre-lease VAT enquiries should also be raised at this time. It is important that the solicitor acting for the proposed tenant satisfies him or herself in respect of compliance with planning regulations. It is the person in occupation of the premises (i.e. the tenant) at the time of an inspection who would be liable should there be found to be any planning irregularities with the premises. We would always advise that any prospective tenant has a comprehensive survey carried out on the property.
There are several key issues in every lease which requires special consideration both in the drafting and in approving:-
REPAIR
There is a lot of confusion within the profession in relation to the repair clause mainly due to different judicial opinion on this clause. Some authorities suggest that, regardless of the terms used, there is no requirement to give back to the landlord the premises in a better state from that which the tenant received when it entered into the lease. In other words, repairs are necessary only to restore the premises to its condition when the tenant took occupation. However, more onerous wording in a repair clause could require the tenant to restore the premises beyond the condition in which they took the premises. In this regard, it is maintained that including the term such as "keeping the building in repair" can involve a duty to put the property into repair even if the property was in a poor state at the time of the grant of the lease.
INSURANCE
The landlord usually insures the property and recoups the cost from the tenant. The landlord's insurance usually includes insurance against loss of rent and consequently rent is suspended if the property becomes unusable due to an insured risk. The tenants procure their own public liability, employer's liability and contents insurance and this is usually a covenant under the lease. As stated earlier, in respect of single let properties the tenant usually looks after all insurances.
RENT REVIEW
On leases longer than five years a rent review is normally carried out every five years or may be done so on a shorter basis if agreed between the parties. During the boom years it was very common for rent review to be on an upward only basis. Section 132 of the Land and Conveyancing Law Reform Act 2009 banned upward only rent review clauses. The provision applies to leases of property for business purposes. The ban will not affect leases entered into before 28th February 2010. Disputes as to rent review are normally referred to an independent surveyor acting as an arbitrator or expert.
TAXES
The new VAT rules were introduced in July 2008. Commercial leases are exempt from VAT. However, a landlord will have the option to tax an individual and we would often advise clients to speak to their accountant/ tax adviser about this before executing any documentation. Income Tax/Corporation Tax will be payable by the landlord on rental income. Where rent is payable to a non-resident, there can be an obligation to withhold income tax from the payment. Currently stamp duty on business leases is calculated at 1% of the annual rent for leases not exceeding 35 years, with an additional stamp duty charge of €12.50 payable if the lease contains a rent review clause and an additional of €12.50 payable on the counterpart lease. The tenant is liable for stamp duty.
There are a number of other clauses which we have not covered in this article such as Statutory Renewal Rights, User and Alienation Clauses, Yielding Up Clauses and Management Company Clauses which should all be carefully drafted and reviewed by any perspective Landlord or Tenant's solicitor.
For further details on anything contained in this article or relating to commercial leases please contact Stephen Cooney at stephencooney@patricktallan.ie
A huge variety of businesses, whether retail, industrial or commercial, occupy premises held under commercial leases. The commercial lease agreement is one of the most complicated agreements you will sign. They can often appear as cumbersome documents often of sixty pages or more weighted down with repetitious legalese. A lease should be drafted so that it is readable as well as reasonably practical so that anyone engaged in commercial business should be able to read, understand and find his way about it.
Broadly speaking, a tenant will be leasing either an entire building or part of a building in a multi let situation. In respect of the former, the lease should be drafted so as to include a full repairing covenant on behalf of the tenant. In respect of the latter the tenant's repairing obligation should be limited to the interior of the premises being leased where the landlord remains responsible for the structure of the whole building or for all areas not being leased. In this situation the lease should provide for the landlord to be fully reimbursed by all tenants for the costs incurred in maintaining the building. This may be facilitated through a service charge provision included in the lease.
Before any of the documentation is negotiated, a solicitor acting for the proposed tenant should carry out a due diligence of the proposed premises. This includes examining all title and planning documentation. Pre-lease enquiries and pre-lease VAT enquiries should also be raised at this time. It is important that the solicitor acting for the proposed tenant satisfies him or herself in respect of compliance with planning regulations. It is the person in occupation of the premises (i.e. the tenant) at the time of an inspection who would be liable should there be found to be any planning irregularities with the premises. We would always advise that any prospective tenant has a comprehensive survey carried out on the property.
There are several key issues in every lease which requires special consideration both in the drafting and in approving:-
REPAIR
There is a lot of confusion within the profession in relation to the repair clause mainly due to different judicial opinion on this clause. Some authorities suggest that, regardless of the terms used, there is no requirement to give back to the landlord the premises in a better state from that which the tenant received when it entered into the lease. In other words, repairs are necessary only to restore the premises to its condition when the tenant took occupation. However, more onerous wording in a repair clause could require the tenant to restore the premises beyond the condition in which they took the premises. In this regard, it is maintained that including the term such as "keeping the building in repair" can involve a duty to put the property into repair even if the property was in a poor state at the time of the grant of the lease.
INSURANCE
The landlord usually insures the property and recoups the cost from the tenant. The landlord's insurance usually includes insurance against loss of rent and consequently rent is suspended if the property becomes unusable due to an insured risk. The tenants procure their own public liability, employer's liability and contents insurance and this is usually a covenant under the lease. As stated earlier, in respect of single let properties the tenant usually looks after all insurances.
RENT REVIEW
On leases longer than five years a rent review is normally carried out every five years or may be done so on a shorter basis if agreed between the parties. During the boom years it was very common for rent review to be on an upward only basis. Section 132 of the Land and Conveyancing Law Reform Act 2009 banned upward only rent review clauses. The provision applies to leases of property for business purposes. The ban will not affect leases entered into before 28th February 2010. Disputes as to rent review are normally referred to an independent surveyor acting as an arbitrator or expert.
TAXES
The new VAT rules were introduced in July 2008. Commercial leases are exempt from VAT. However, a landlord will have the option to tax an individual and we would often advise clients to speak to their accountant/ tax adviser about this before executing any documentation. Income Tax/Corporation Tax will be payable by the landlord on rental income. Where rent is payable to a non-resident, there can be an obligation to withhold income tax from the payment. Currently stamp duty on business leases is calculated at 1% of the annual rent for leases not exceeding 35 years, with an additional stamp duty charge of €12.50 payable if the lease contains a rent review clause and an additional of €12.50 payable on the counterpart lease. The tenant is liable for stamp duty.
There are a number of other clauses which we have not covered in this article such as Statutory Renewal Rights, User and Alienation Clauses, Yielding Up Clauses and Management Company Clauses which should all be carefully drafted and reviewed by any perspective Landlord or Tenant's solicitor.
For further details on anything contained in this article or relating to commercial leases please contact Stephen Cooney at stephencooney@patricktallan.ie