Business costs are high. Startups now need tens of thousands of pounds just to survive the first year in business, with even more needed beyond that if their goal is to scale. Combine this with a weak pound and it’s easy to see why fewer and fewer businesses can afford to buy commercial property outright.
What’s more, even those who can afford it rarely want to take the risk; the high-street of the future remains an unknown entity, and though omnichannel retail has given brick-and-mortar stores a new lease of life, outright purchase is a risky move.
For these reasons, commercial rentals are booming in popularity. Before taking on a commercial tenancy, however, it pays to know the legal basics of how to lease office space.
Legal framework
A commercial tenancy agreement (CTA) is the legal business tenancy agreement under which a tenant gains the use of a premises owned by a landlord. It might be headed as an office space rental agreement or an office space lease agreement, but the legal treatment is the same.
The CTA is an agreement between the two aforementioned parties, and is governed primarily by the Landlord and Tenant Act 1954 (LTA 1954). This legislation limits landlord power and boosts the rights of the tenant, unless both parties agree to contract out of any particular sections when the CTA is signed.
Lease or licence?
A CTA can take the legal form of a lease or a licence. A lease creates a legal interest in the property for the tenant for the length of the CTA term. A licence, on the other hand, only gives the tenant the right to occupy.
Unless specifically agreed between the parties, which form the CTA takes depends on a range of factors – it’s worth considering which suits your needs, and imperative that you seek independent legal advice before agreeing terms.
Security of tenure
From a landlord’s point of view, one of the most important considerations of a CTA is whether they will be able to get back control of the property when the CTA term ends. If a tenant has ‘security of tenure’, the landlord will not automatically be able to do this. The tenant, if they have security of tenure, will have the right to stay during the ‘holding over’ period between the end of one CTA and the agreement of another, and the right to be offered a new CTA on the same terms. From a tenant’s perspective, this is obviously advantageous and desirable.
The LTA 1954 automatically gives tenants security of tenure if the CTA term is over six months, or if the tenant has been in occupation for more than 12 months, unless both parties have opted out of the relevant sections. Whichever side you fall on, independent legal advice is essential to avoid a tricky situation down the line.
Allowed use
Finally, within the CTA, the landlord can specify what the tenant is allowed to use the property for. This should be agreed beforehand, and will probably not be contentious, as both parties will want to keep the allowed uses broad and general.
For a tenant, a broad definition provides more freedom to adapt and expand business functions. For a landlord, a broad definition means a larger sample size to compare with when calculating market value for rent rises, or when looking for a new tenant to take over an existing CTA.
Of course, these are just the basics – a starting point for thinking about your next office lease contract. Before entering into negotiations, and certainly before committing to a CTA, both parties should seek full, independent legal advice.
