The fundamentals of leasing: part 3
In our continuing series covering the fundamentals associated with leasing, Real Estate partner Owen McKenna further summarises the key tenant covenants in commercial leases.
A commercial lease will usually oblige a tenant to keep the demised premises in good repair and condition. The impact of this repairing obligation on the tenant depends on two main factors:
* the extent of the premises included in the tenant’s demise
* the state of repair of the premises at the start of the lease
A tenant’s repairing obligation will typically extend only to the premises within its demise. The parties should examine carefully the definition of the demised premises in the lease, ensuring that it is as specific as possible. In a lease of whole, the tenant will usually be responsible for repairing the whole building. In a lease of part, the repairing obligations will be split between the parties.
An obligation to “keep” the premises in repair will include an obligation to put the premises into repair if there is disrepair at the start of the lease. Tenants will therefore often seek to limit the repairing obligation to the condition of the premises at the commencement of the lease by way of a schedule of condition. A properly prepared schedule of condition is invaluable when it comes to the question of dilapidations during or at the expiry of the term of the lease.
Commercial leases will usually also contain a separate tenant covenant obliging the tenant to decorate its premises, either at stated minimum intervals or as often as reasonably necessary. Tenants may also be obliged to decorate at some point during the final year of the term to ensure that the premises are left in a suitable state for re-letting. For this reason, the landlord will often want to approve the colours and materials used in this decoration.
If a lease is silent on alienation, the tenant will be able to deal with the lease however it chooses. Therefore, leases usually contain restrictions on permitted dealings to enable the landlord to control the identity of the tenant (and the occupier of the premises). The landlord will want to ensure that the tenant is able to meet its financial commitments under the lease. As well as financial concerns, there may be other situations where the landlord may be particularly concerned about the identity of the tenant or occupier (for example, a landlord of a shopping centre will require control over dealings to ensure an appropriate tenant mix in its centre).
If a lease is silent on the question of alterations, the tenant is free to carry out any it chooses to the premises in its demise, subject to the tenant’s implied obligation not to commit waste.
However, most leases restrict the tenant’s ability to carry out alterations to its premises. The extent of the restrictions will depend on the nature of the premises and the landlord’s desired level of control. While the tenant will be anxious to configure the premises to its needs, the landlord’s priority will be protecting the value of the premises and their future marketability.