The fundamentals of leasing: part 4
In the final instalment of our lease fundamentals series, Real Estate partner Owen McKenna further explores tenant covenants commonly found in commercial leases.
A tenant will normally expect to display signs outside their premises, indicating the name and nature of their business. In a lease of part, tenants may want to place signs both outside the building and in the common parts.
Some landlords will want to control the tenant’s ability to attach signs to, or which are visible from, the exterior of the building. This is to protect the external appearance of the building. Restrictions may include a limit on the number of signs, their location or size or a requirement for consent.
Commercial leases usually contain restrictions on the tenant’s use of the premises (the permitted use) and the tenant’s ability to change it during the term.
In some circumstances, the lease will allow the tenant to change the use of the premises with landlord’s consent. Where the use specifies a certain type of business, this may permit another use within the same use class. It less common for a lease to permit a change of use to a different use class as this will involve a change to the nature of the property.
In addition to the permitted use, commercial leases often contain various ancillary user provisions, such as restrictions on the hours of use, “keep open” provisions and prohibited uses. These prohibited uses will typically include anything illegal, offensive, noisy or dangerous and may also include specific uses such as gambling, auctions, sleeping and residing.
Break clauses allow either (or both) of the parties to terminate a lease early. The right to break may be exercisable on one or more specified dates or at any time during the term on a rolling basis. Break clauses are not in every commercial lease but may be agreed as part of the heads of terms.
A break clause should make clear who it is exercisable by, when it is exercisable and how. Where a break right is subject to conditions, the break clause should specify whether they must be satisfied at the date of service of the break notice or at the break date or both.
A landlord may forfeit a commercial lease either by peaceably re-entering the premises or by going to court to bring forfeiture proceedings. The forfeiture provision in the lease will state the events that will trigger the landlord’s ability to re-enter the premises. In a rack rent lease, these will typically be:
* Non-payment of rent(s) within a specified number of days of the due date
* Breach of a condition, or tenant covenant, in the lease
* One of a list of specified insolvency events occurring in relation to the tenant
Although the landlord has an implied right to re-enter for breach of condition, the right to re-enter for breach of covenant must be expressly reserved. Landlords tend to make both rights express to avoid disputes about the difference between a covenant and a condition.
If you have any questions about the issues covered here, please get in touch. Our team of expert lawyers will be happy to speak with you.