Landlords warned about commercial property leases

Some investors are investing in commercial property without getting legal advice, which could cause them big problems in the future, Thursfield Solicitors have warned.

Stewart Coles, associate director in the commercial property team at Thursfields, stated that leases are complex and landlords should take care when signing up new tenants.

Investors need to understand the difference between a full repairing and insuring lease (FRI) and an internal repairing insuring lease (IRI).

Stewart Coles

He said: “An FRI is the most common lease when a tenant occupies the entire building and is responsible for the whole of the property, including the structure and roof, with the landlord insuring the building but the tenant paying the premium.

“In contrast, an IRI lease is more appropriate when a tenant is taking part of the space, say a floor in an office building or a ground floor shop, taking responsibility for the interior and contributing towards insurance.

“With an IRI lease, landlords need to consider who pays for the exterior or how to recuperate repair costs, either through formal service charges or charging tenants as and when repairs are required.

“It is in both parties’ interests to ensure that a clear and accurate schedule of condition is prepared and attached to the lease, to avoid any potential disputes later.

“Some landlords just template a lease and use it over and over for years and this lack of attention to the legal detail that’s involved in every different case could result in big problems.”

Coles said that another issue for landlords to consider is financial security to cover rent if a tenant’s business fails – either a personal guarantor for a limited company, or a rental deposit of three or six months.

He explained these additional forms of security had proved particularly important during Covid-19, as legislation was introduced that meant landlords cannot forfeit a lease if the pandemic impacts a tenant’s business and they cannot pay rent.

The legislation remains until 25 March 2022, but with guarantors or rental deposits in place landlords still have a means of recuperating arrears.

Another pitfall for landlords, according to Coles, is giving keys to a tenant before a lease is signed.

He added: “A landlord quite often gives a tenant the keys thinking ‘we’re nearly there’ with the lease, and then the impetus to finalise and sign the lease gets lost.

“Once a tenant has been in occupation and paying rent for several months, it could be deemed a ‘periodic tenancy’, protected by the Landlord and Tenant Act, with security of tenure.”

Mr Coles added that the commercial landscape was now shifting, with more office space on the market as businesses review commitments or adopt flexible working.

He said: “This means more flexibility is creeping into negotiations, with shorter terms being requested and easier termination, or landlords perhaps looking at a change of use so properties can be rented out for different purposes, such as serviced offices.

“Landlords and property managers should have robust systems in place to manage the increase in critical lease dates and changing lease arrangements, such as cloud-based document storage, online payments for tenants, accounting integrations and more.”

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