We, at Pierse Fitzgibbon Solicitors, have extensive experience in dealing with Commercial Property and in particular, commercial leases. Commercial leases deal with the lease of business premises to another, for example, shopping centres and office blocks, while residential leases involve the letting of a house to a tenant to live there. There are various issues to be dealt with in the lease of any premises, however we have provided a summary of those which are pertinent to a commercial lease.
What is a service charge?
A service charge is a charge imposed on tenants to provide a fund from which the services relating to the common areas, for example, public liability insurance, heating, cleaning and lighting will be paid. It is important to note that the rent to be paid in respect of a commercial lease is not attributable to the costs of providing such services. A service charge primarily occurs where a group of tenants are situated within one building, for example, an office block or shopping centres.
What are the common areas of dispute regarding service charges?
- Insurance: Insurance in relation to Employer’s Liability, Plant and Machinery and Public Liability for the common parts of the building should form part of the service charge.
- Repairs and Renewals: Any money collected for repairs should be held in trust for the tenant, and cannot be used by the Landlord for any other purpose other than the repairs of the common areas.
- Plant and Machinery: A Landlord is generally obliged to maintain and repair such equipment and plant as lifts, boilers and central heating. It is often the case that such plant and machinery may need to be replaced, therefore the Landlord should be entitled to recover the renewal costs of such equipment as well as repair costs. This should be provided for in the Lease.
How is the amount of the service charge determined?
In the first year of the lease, the payments are generally estimated based on the Landlord’s estimate of the probable outgoings for the year. When the actual costs are known, the Tenant receives a refund of any overpayment of same or alternatively, must reimburse the Landlord for any extra charge. This extra charge may be added on to the following year’s service charge payment. For subsequent years the service charges are normally based on the previous years’ costs.
How are service charges apportioned among tenants?
There are a number of methods for calculating a Tenant’s share of the service costs. They are as follows:
(a) Fixed percentage
(b) Rateable value
(c) Floor areas
It is important to note that whatever method is chosen it must be a defined one so as to ensure certainty when calculating a Tenant’s share of the service charge.
Rent Review clauses
What is a rent review clause?
A rent review clause is a clause in a lease setting out that the rent payable in respect of that lease must be reviewed every specified number of years. The most common period in a commercial lease is every five years and at that stage, the rent is examined to see if it corresponds to the market rent at the date of the review. It is important to note that a rent review clause must be carefully drafted, as if it is not, it may not be operable or else may only give a review after the first five years of entering into the Lease, and nothing thereafter.
It is common to include an “upwards only” clause in the Lease, as therefore the rent cannot fall below what was previously payable.
How is a rent review carried out?
A rent review is normally carried out in two ways. Firstly, by agreement between the Landlord and the Tenant or secondly, by an independent person appointed by both parties. This person can be an expert in the area or an Arbitrator. In general, a Landlord may prefer an expert as this will usually save time instead of trying to agree any rent with the Tenant. The person appointed to review the rent is generally appointed by the Landlord, however if within a certain time, the Landlord does not appoint a person, the tenant may then make the nomination. Where a revised rent has been agreed, it is advisable to record this revised rent and put it with the lease.
What is Alienation?
Alienation refers to the assignment and subletting by a tenant to another of the premises he has leased from the Landlord.
Are there restrictions on Alienation?
It is common practice for a Landlord to impose various restrictions on a Tenant regarding the subletting or assignment of a premises to another. The purpose of a restriction on a tenant is to ensure that the Landlord retains control over who may take over the premises. All modern leases, whether commercial or not, place a restriction on the tenant preventing him or her from assigning, subletting or otherwise parting with possession of the premises without the Landlord’s prior written consent. It is also common to place an absolute prohibition on the assignment or subletting of part of the premises. It is further common to provide that a Landlord may not unreasonably withhold his or her consent in relation to the subletting or assignment of the full premises by a tenant to another. The only exception where a Landlord cannot absolutely prohibit the assignment or subletting of part of a building to another is where the Landlord leases a building to a tenant, which is intended to be divided into various units, and each such unit to be leased to another.
What if a Landlord unreasonably withholds his consent?
If a Tenant believes that a Landlord has unreasonably withheld his consent to an assignment or subletting, that Tenant may then make an application to the Court for a declaration that the consent has been unreasonably withheld, and for an Order allowing the Tenant to assign or sublet the premises without the consent of the Landlord. It is important that a tenant does not assign or sublet a premises without the consent of the Landlord or without the Order of the Court, as otherwise he may find himself in breach of a Covenant and may have to pay damages to the Landlord in respect of that breach. The onus of proving that a Landlord’s consent is unreasonably withheld is on the Tenant.