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An agreement to enter into a Lease, rather than the lease itself. Such an agreement will be necessary where a tenant wants to commit to the premises that are under development or in the course of refurbishment before they are completed and ready for occupation.
Alienation
The transfer of an interest in property to another party – usually found in Heads of Terms describing the ability of the Tenant to assign the lease or sub-let under the terms of the Lease.
Alterations
The tenant normally has the right to make internal non-structural alterations to the premises, provided that it has made a formal application to the landlord for approval. The lease will also specify if other alterations may be permitted in certain circumstances.
Arbitration
A method of settling disputes by reference to an independent and impartial third party, usually an arbitrator appointed by the President of the RICS. Arbitration is essentially an adjudication of the arguments of the parties, and as such differs from independent expert determination. Arbitration is often referred to in leases as a means of resolving disputes at rent review.
Assignee
A party to whom a lease has been assigned (see entry on Assignment below).
Assignment
The transfer of a lease from one party to the other. Once a lease has been assigned, the assignee becomes responsible to the landlord for paying the rent and fulfilling the other obligations of the lease; however, in the event of default, the landlord can require the assignor to pay the rent under the doctrine of privity of contract, where the latter still applies.
Assignor
One who assigns a lease.
Authorised Guarantee Agreement (AGA)
A usual requirement on granting a lease. The tenant gives an AGA if it assigns the lease, guaranteeing the assignee’s performance of the lease obligations given to the landlord.
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Break clause
A clause in a lease giving either or both parties the right to terminate the lease in specified circumstances. Typically a tenant will be required to have restored the premises to good repair and condition in order to break the lease on the specified date. It is essential to take advice on the specific wording.
Building Regulations
The majority of building projects are required to comply with Building Regulations. They exist to ensure the health and safety of people in and around all types of buildings as well as providing for energy conservation, and access to and use of buildings.
Building surveyor
A chartered building surveyor assesses the physical condition of property, identifies how condition relates to legal contracts, like leases, and advises on dilapidations, reinstatement, fit-out work, and procuring specialist engineering advice.
Buildings insurance
Insurance against fire and other risks, including terrorism, to cover the cost of rebuilding a property and loss of rent, the cost of which is recovered from tenants according to their share of the whole property.
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Capital value
The value of an asset, freehold or leasehold, as distinct from its annual or periodic (rental) value.
Churn
The process of moving people and functions around. This will be far less expensive if staff work in open plan at standardised workstations, than if partitions have to be taken down and put up.
Comparables
In determining the initial rent, or the market rent during the course of a rent review, parties and those acting on their behalf will have regard to evidence of rents for similar properties. Comparables may also be used to analyse properties' sale values.
Code of Practice for Commercial Leases in England and Wales
Published in April 2002 to promote good business practice in negotiating commercial lease terms, address behaviour of the parties during the course of a lease, and recommend specific changes to lease terms.
Confidentiality clause
An agreement between the parties to a lease or sale that some or all of the terms will remain confidential.
Contents insurance
Insurance cover taken out by the occupier for loss from fire, theft and other risks to furniture, fittings and office equipment.
Contracting out
Agreement between landlord and tenant that the security of tenure provisions of Part II of the Landlord and Tenant Act 1954 shall not apply. The landlord must serve notice on the tenant (clarify – serve notice on the tenant that he is contracting out of the Landlord and Tenant Act) and the tenant must sign a declaration before the new/altered lease is signed.(Section 38(4) of the 1954 Act makes specific provision for this. Such an agreement must be sanctioned by the court, on the joint application by landlord and tenant.)
Covenant
A clause in the lease requiring the tenant (or landlord) to do something or to refrain from doing something. Also, as a separate meaning, the worth of a tenant and hence the risk of default, which will have a bearing on the value of the lease and the landlord’s attitude to the negotiations and terms of the lease.
Cost consultant
A quantity surveyor who provides budgets for projects and procures and manages fit-out contracts.
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Demised premises
Premises which are the subject of a lease.
Determination
The bringing or coming to an end of a lease, or an estate or interest in property, especially by notice as expressly provided for in the lease or as a consequence of a fundamental breach of a lease condition. See also termination.
Dilapidations
This term principally covers proceedings whereby a landlord, by service of a ‘Schedule of Dilapidations’ seeks either to enforce a tenant’s repairing obligations under a lease of business premises, or claims compensation for lack of repair by the tenant at the end of the lease term.
Due diligence
Investigating a property and examining information to verify that it is fit for purpose from a legal, physical, technical, regulatory and financial perspective.
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Estimated Rental Value (ERV)
An estimate of the rental which a property is likely to command in the open market at a given time.
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Fit-out contractor
A contracting company that will undertake building works to meet an occupier’s bespoke fitting out requirements, based on the agreed design.
Forfeiture
Forfeiture of a lease occurs when the landlord exercises his right to regain possession against the wishes of the tenant, where there is a breach in a condition of the lease, or a breach of a covenant.
Freeholder
One holding an estate in “"fee simple absolute in possession”". Essentially, the building’s ultimate owner.
Full repairing and insuring (FRI) lease
An FRI lease requires the tenant to pay all running costs, e.g. maintenance, rates and insurance. Where a tenant occupies part of a property, it may be said to have a full repairing and insuring ‘equivalent’ lease, in that whilst it only takes direct responsibility for repairs to the demise, it also pays a proportion of the costs incurred by the landlord on the building through the service charge.
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Head lessee
Where a sub-tenancy (or series of sub-tenancies) exists, the highest leaseholder in the chain (who pays head rent to the freeholder).
Headline rent
The rent being paid and which is recorded on the lease. This may not take account of concessions such as rent-free periods, which create an effective rent.
Heads of Terms
A document setting out the principal terms which the parties have agreed, subject to contract and any other conditions stated. As a minimum, the Heads of Terms will usually identify the parties, the premises, the duration and principal terms of the lease, including rent and responsibility for repairs and insurance. The terms will also identify whether the rent is subject to VAT and who is to be responsible for payment of the costs of preparing the legal documentation.
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Independent expert determination
An independent determination of the rent to be paid on review. Independent expert determination differs from arbitration in that the independent expert is not confined to the evidence presented by the parties.
Indexation
The regular adjustment of a rent in accordance with a specified index, e.g. the Retail Price Index. This can be an alternative to open market rent reviews.
Inducements
Concessions to a tenant on taking up a lease in the form of a rent free period, a contribution towards the fit-out cost, or other capital contribution.
Institutional lease
A typical institutional modern lease which meets the needs of most (institutional) landlords by transferring FRI responsibilities to the tenant. Generally tenants pay for all repairs and insurance to give the landlord a clear net income and minimise its management costs. Traditionally the term has been a minimum of 15 years without options to break (see Break Clause) and with 5 yearly upwards only rent reviews, but landlords are increasingly willing to accept shorter lease terms provided other terms are “institutionally” acceptable.
Interim rent
A landlord may apply to the court to fix an interim rent when it has given notice of termination of a tenancy or where the tenant has served notice of a request for a new tenancy on the landlord.
Internal repairing lease
Where the tenant is only responsible for repairs to the interior of the demise.
Lanlord & Tenant Act 1954
The principal legislation that governs business tenancies and which provides for business tenants to be afforded security of tenure on expiry of their tenancy (subject to exceptions) and which sets out the process by which leases can be renewed. (Legal advice should be taken on its precise terms).
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Lessee
A party to whom a property has been let – interchangeable with the term Tenant.
Lessor
The party letting the property (ie the landlord).
Licence
The grant of a licence does not create an estate in land and the licencee does not gain an interest in the property, purely permission to occupy it.
The security of tenured afforded to tenants on most business leases does not apply where the premises can be shown to be held on a licence.
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Market rent
The best rent at which a property might reasonably be expected to be let with vacant possession in the open market taking full account of all terms of the tenancy offered.
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Net internal area
The most common definition of the area of business space and used as the reference point by which rent is calculated for the demised area, when agreed as a rent per square foot or per square metre. It comprises the usable area within a building measured to the internal face of the perimeter walls at each floor level, and excluding toilets, staircases, plant areas, etc. Internal demountable partitions are ignored.
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Open market rent
See market rent.
Open market rent review
Where the rent review clause provides that the rent on review should be based on the open market prevailing for new lettings of similar space. Normally landlords require rent reviews to be “upward only”, i.e. the rent on review cannot be less than the passing rent before the review date, even if the current open market rent is lower.
Over-renting
This occurs when the rent passing exceeds the current open market rent. In such circumstances a tenant seeking to assign the lease may offer an assignee a reverse premium.
Overriding lease
An intermediate lease which the landlord grants to another party for a term longer than that of an existing the occupational lease.
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Partitioned
Used to describe office space that has been divided up by the occupier to provide individual offices rather than open plan space, usually where quiet and private work is carried out, e.g. by solicitor, thereby creating a landlord and tenant, but not a contractual, relationship between the new and old lessee.
Planning supervisor
A member of the project delivery team who is responsible for ensuring that the health and safety requirements set out in the Construction (Design and Management) Regulations 1994 are complied with.
Premium
The price an actual or prospective lessee pays to a lessor, usually in return for the rent being reduced to below what otherwise would be payable. Alternatively, a sum paid for the purchase of a lease, in addition to the rent. (See also Rreverse Ppremium.)
Prime location
The most desirable or sought after location, which attracts the highest rental values.
Prime property
A term used to define property of particular interest to investors, but also to tenants.
Privity of contract
The principle in English common law that landlord and tenant continue to have obligations under the lease despite subsequent assignment. Privity of contract was abolished for new leases coming into force from 1 January 1996. Leases entered into before then are still subject to privity, but landlords wishing to sue previous tenants still bound by privity have to serve notice within six months of rent or service charges becoming due. The current legislation enables landlords in certain circumstances to require the outgoing tenant to guarantee the performance of the incoming tenant, until there is a further assignment.
Property adviser
A chartered surveyor or property consultant combining business understanding, market expertise, process management and consultancy expertise, to oversee the relocation process and act as client representative throughout.
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Quiet enjoyment
Most leases contain a covenant for quiet enjoyment, entitling the tenant to enjoy his lease without lawful entry, eviction or interruption.
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Rack rent
The best market rent obtainable.
Re-entry
A landlord may exercise his right to regain possession of premises by peaceable re-entry where there has been a breach of a condition by the tenant, or a breach of a covenant of a lease with a forfeiture clause. (See also Forfeiture.)
Reinstatement
The responsibility of the tenant to reinstate the premises to their condition at the commencement of the tenancy, normally by removing internal partitioning and other non-structural alterations.
Rent passing
The actual current rent being paid.
Rent review
Leases generally contain clauses providing for a periodical review of the rent, usually say at five yearly intervals. The lease will generally specify what the basis of the review is to be: e.g. the open market rent prevailing at the time of the review, or, as is frequently the case, upwards only (see Upward Only Rent Rreviews). Determination of rent will require assumptions to be made and some matters to be disregarded, typically, the tenant’s actual occupation and alterations carried out by the tenant.
Rental value
The rent that a property might reasonably be expected to command in the open market at a given time, subject to the terms of the lease.
Restrictive covenant
A covenant in a lease restricting the tenant in some respect, e.g. a covenant providing that only a particular type of trade may be carried out at the premises.
Reverse premium
On assignment, the payment of a sum of money by the assignor to the assignee a sum of money to reflect the unfavourable lease terms, e.g. where there is over-renting or where the demise is not in good condition.
Reversion
The return of property to the landlord on the expiry of a lease.
RICS
The Royal Institution of Chartered Surveyors
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Schedule of Condition
A record of the state of the premises at the commencement of a tenancy, usually to limit the tenant’s obligations at lease expiry. The schedule may include specifications and photographs.
Secondary property
A term used for property which is defective in one (or possibly two) of the characteristics of prime property.
Security of tenure
The statutory right of a tenant to renew the lease at the end of a term. Part II of the Landlord and Tenant Act 1954 gives business tenants security of tenure, but parties may agree to make a joint application to the court to exclude security of tenure. Where there is security of tenure, a landlord can only oppose a tenant's application for a new business tenancy on a limited number of grounds, where:
- The tenant has not sufficiently complied with the lease terms or otherwise failed to behave properly as a tenant.
- The landlord can provide suitable alternative accommodation for the tenant.
- The landlord may suffer financially when a sub-tenant occupying only part of the premises gets a new tenancy.
- The landlord requires possession to demolish the property.
- The landlord intends to use the premises himself for a business or a residence.
Service charge
The amount a tenant pays for services his landlord provides, usually covering repairs and redecoration of the exterior of the property and maintenance of common parts, as well as services such as security, heating and lighting, fire protection, etc.
Serviced office
An office offered with services, equipment and furniture provided by the landlord which are included in the cost.
Side agreement
Terms agreed separately by landlord and tenant, or by buyer and seller, which do not form part of the lease or contract of sale.
Stamp Duty Land Tax
A tax payable upon completing a transaction document (when the document is stamped), payable by the purchaser or tenant.
Refer to www.hmrc.gov.uk/so/current_sdlt_rates.htm for rates applicable.
Subletting
Where the tenant lets part or all of the premises to a subtenant, as permitted by the terms of the lease. It differs from assignment in that the head lessee remains responsible to the landlord for the payment of rent and fulfilment of other obligations.
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Tenancy
A tenancy gives the tenant a legal interest in the land - in effect, legal ownership for the period of the tenancy. The tenancy can be sold (assigned) to another tenant.
A tenancy is an “"estate in land”", granted for a determined period of time (term of years or fixed term or a specific period (a periodic tenancy - yearly, monthly, weekly).
In return for the “"time limited”" but exclusive use and possession of the land (and any building/s on the land) the tenant pays his landlord a rent.
Termination
The coming or bringing to an end of a lease, by mutual agreement, by the effluxion of time, or by the exercise of a right of one of the parties.
Turnover rent
Where part or all of a rent, especially of retail premises, is based on a specified proportion of the tenant's turnover.
Turn-key
An arrangement whereby the landlord will provide accommodation ready for the tenant to occupy, including work required by the tenant to adapt the space to its own requirements.
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Up/down review clauses
See open market rent review.
Upward only rent reviews
Clauses in leases providing for regular reviews, at which the rent will be fixed at either the current rent passing or the open market level, whichever the higher.
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VAT (elected for)
For most properties, landlords have elected to charge VAT on rent payable by their tenants to enable them to recover any VAT that they incur on development or refurbishment costs and fees. This will increase costs to tenants who are unable to recover VAT in their normal business activities, but otherwise VAT should only present a cash flow management issue.
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