Key Issues
- 1. Term and Renewal Rights
Landlords should be aware that after five years in occupation, a tenant using a premises for business purposes continuously for at least five years acquires a right to renew the lease pursuant to the Landlord and Tenant (Amendment) Act, 1980 as amended.
If a landlord wishes to retain flexibility beyond the expiry of the initial term, it should ensure the tenant expressly renounces its statutory rights. This is normally done by way of a Deed of Renunciation. For this to be valid, a tenant must receive independent legal advice.
For a tenant, its statutory rights of renewal are of the utmost importance and should not be given up without due consideration. Agreeing to renounce tenancy rights may be a useful bargaining tool as in return for this, a tenant may seek the inclusion of more favourable terms such as a longer term and/or an inclusion of a tenant only break option.
- 2. Break Option
If a tenant is entering into a full repair and insuring lease (“FRI Iease”), which normally involves a term of between 10 and 20 years, it may seek to include a provision which would provide it with the ability to terminate the lease prior to its expiry.
For example, in respect of a lease with a 10 or 20 year term, a break option may be sought during year 5 or every five years in respect of the latter.
A landlord will want certainty regarding when a tenant can exercise its break option. Therefore, the lease should specify that the tenant has to adhere to a specific notice period in order to avail of the break option. Landlords will want as much notice as possible so an appropriate period may be between 3 and 12 months.
In addition, to avoid the tenant’s right being open ended the break option provision in the lease should make time of the essence. This means if the tenant does not issue written notice that it will avail of the break option by a specified date, it will not be possible to do so following this.
Landlords may also seek that the tenant pay a particular sum in return for exercising the break option, for example one quarters rent.
This payment would provide the landlord with comfort in the event a replacement tenant is not obtained prior to the original tenant vacating the property. Understandably tenants often resist such a provision.
- 3. Assignment/Subletting Provisions
It is important for a lease to contain a provision allowing the tenant to assign or sublet the premises to a third party during the term.
Assignment means that a third party who acquires the original tenant’s rights (referred to as the “assignee”) steps into the shoes of the tenant, meaning the original tenant’s future obligations to the landlord cease.
Subletting means that a new party is added to the existing relationship. The original lease between landlord and tenant remains in place. However, the original tenant creates a separate contractual relationship with the new third party (referred to as the “subtenant”). A landlord may insist that the lease obliges any subtenant to provide certain covenants to the landlord directly.
It is important for a landlord to retain control over any new party occupying the premises. Therefore, the lease should provide that the landlord’s written consent must be obtained for any assignment or subletting to be valid. However, to protect the tenant the lease should provide that the landlord’s consent must not be unreasonably withheld or delayed.
The landlord may seek to include a number of additional preconditions, such as the
assignee or subtenant must pay rent at a level not lower than the rent payable in the original lease and that the assignee or subtenant be of similar financial standing to the original tenant.
Also, it is important to be aware of the definition of the permitted use in the lease as unless the lease expressly states otherwise, it will only be possible for a tenant to assign or sublet to an entity which will use the premises in the same way as the original tenant.
In addition, if the demised premises is part of a larger development, assignment/subletting options may be limited as the landlord may have entered into restrictive covenants with other tenants which give them exclusivity in respect of certain types of use. This is particularly the case with anchor tenants in multi-unit developments.
Tenants should be aware if they are taking an assignment of a lease which was granted prior to 28 February 2010 it is likely the original lease contains an upwards only rent review clause. Therefore, although upwards only rent reviews are not enforceable in respect of leases entered into from 28 February 2010, assignees of older leases are still bound by these provisions.
Therefore, an assignee of a lease entered into prior to 28 February 2010 which contains an upwards only rent review provision should attempt to ensure as part of the assignment, the upwards only rent review is disapplied. Alternatively, a new lease should be entered into which is not subject to upwards only rent reviews. However, the relevant landlord is likely to resist this.
- 4. Repair Obligations
Obliging a tenant to repair both the internal and external parts of a demised premises represents a significant cost for a tenant as it may include, for example, an obligation to repair the roof.
It may be more appropriate for the lease to contain an internal only repair obligation on a tenant. This is particularly the case if the term of the lease is less than five years.
In addition, tenants should also ensure that its obligation is to “keep” in good repair rather than to “put” in good repair, as the latter could be interpreted as obliging the tenant to put the premises in better repair than it was in at the outset of the lease.
- 5. Lender Consent
Another important aspect for both sides to be aware of is that the landlord may be obliged to obtain the consent of its lender to any new lease.
Tenants should ensure that this consent is obtained in writing at the time of pre-lease negotiations. If a landlord’s lender has not consented to a lease, and a tenant commences occupation of the premises even if the lease has been fully executed, the tenant may have to vacate the premises.
This would be extremely damaging for the tenant, particularly if it has just completed an expensive fit out. Therefore, the issue of whether lender consent is required should be clarified at the outset of commercial discussions.
- 6. VAT
The issue of whether or not VAT will be charged on the rent is an important commercial issue for both landlords and tenants.
However, despite this in my experience this issue is often not discussed at the outset. This often causes delays when each side’s legal advisors are seeking to finalise the lease in circumstances where the VAT treatment has not been agreed between the parties. Therefore, both landlord and tenant should agree the position regarding VAT at the outset.
Both sides should also ensure the wording of the VAT clause in the lease is approved their accountant or financial advisor to avoid any issues.
Given the significance of the above issues, it is vital that landlords and tenants are fully aware and informed from the outset of pre-lease negotiations.
Chris Connolly is a Partner specialising in Commercial Property in Moran & Ryan, a boutique commercial law firm in Dublin. For more information, please visit www.moranryan.com, email chrisconnolly@moranryan.com or call 01 8725622.
