Category Archive: Commercial Property

1. Forfeiture Clauses – what are they and how do they work?

   June 20, 2022 9:29 am Leave a Comment

   A forfeiture clause is a common clause in a commercial property lease and allows the Landlord to terminate the lease prematurely where the tenant is in breach of their obligations.

   The terms of a commercial lease can be breached in many ways, such as a Tenant’s failure to pay rent; a change of use without permission; failing to repair the Property in accordance with the Lease; allowing a third party to occupy and many more.

   In most cases the breaches can be remedied quite easily, and the Landlord may allow the Tenant time to remedy the breach without taking further action, waiving his right to forfeit by allowing the breach to continue, or acting in a way that allows the breach to continue.

   However, some breaches would give the Landlord real cause for concern about the Tenant’s ability to fulfil their obligations under the Lease for the full contractual term, and so most commercial leases will contain a forfeiture clause which will allow the Landlord to forfeit the lease if the tenant breaks certain conditions.

   The most common reason for terminating a lease prematurely is non-payment of rent, the tenant has been made bankrupt, goes into liquidation or there is an insolvency arrangement such as administration or bankruptcy, or the Tenant has breached any other term of the Lease. Most modern leases should include a forfeiture clause setting out specifically that these are the reasons for forfeiture.

   Procedure

   If a right to forfeit arises, depending on the reason for the forfeiture, a Landlord must follow a statutory notice procedure before terminating the lease. In most cases a s.146(1) notice must be served upon the tenant which allows them time to rectify the breach, by setting out in the notice what the breach is, and if there is a possible remedy for that breach including a request to do so. However, the exception to this is non-payment of rent. Failure to remedy this breach by the tenant within a reasonable amount of time or a set time stated in the Lease, the Landlord is then within their right to exercise its rights to forfeit.

   Landlords Waiver

   When a right to forfeit has been made clear, it is imperative that the Landlord does not do anything that could waive that right. Waivers may occur if the Landlord knows of the tenant’s breach, does something that suggests that the lease continues to exist (for example, accepts or demands rent) and communicates that to the tenant.

   Types of Forfeiture

   There are two approaches open to commercial Landlords when a right to forfeit arises – peaceable re-entry or Court proceedings. 

   Peaceable entry

   This is where (subject to statutory limitations on the Landlord’s right to forfeit) the Landlord physically re-enters the property and changes the locks themselves (or by a third party such as bailiffs) or prevents the tenant entering and attaching notices of forfeiture.

   Court proceedings

   Forfeiture by court proceedings is where the Landlord issues proceedings for the forfeiture of the lease and the lease terminates upon the proceedings being served. However, the forfeiture will not be deemed effective for some time – during the period of the proceedings being served and the court confirming whether the forfeiture was effective, the Landlord is considered to have ended the lease and during this period cannot seek to enforce or rely on the Tenant’s covenants within the Lease.

   Relief from Forfeiture

   Upon the Landlord forfeiting the lease, a tenant (or a third party with an interest in the lease such as mortgagee) can apply for relief of forfeiture from the Court. The Court’s approach to granting relief depends on the type of breach and, the seriousness of the breach, the conduct of each party, whether the breach can be easily remedied and that is balanced against any loss suffered by the Landlord as against the potential loss by the Tenant if the relief was not granted. The lease will be reinstated if the Tenants application for relief is granted.  

   Effect of Forfeiture

   Once it has been ascertained that forfeiture has been “effected”, neither the Landlord nor the Tenant has any continuing liabilities under the lease but they do remain liable for any breaches that occurred prior to the forfeiture. The tenancy will immediately end and the Landlord is entitled to possession.

2. When does a residential transaction become commercial?

   December 22, 2021 9:48 am Leave a Comment

   Kelly Myatt, Director and solicitor specialising in residential, commercial and agricultural transactions is often asked to deal with “in-between” jobs. 

   These types of jobs on first appearance seem residential in nature, however, hidden in the depths of the detail can often be commercial elements.

   An example would be the purchase of a residential property situated on a large plot of land. The plot of land and arguably the existing dwelling has potential for development.  What first appeared to be a straightforward purchase of a residential property now has a fresh direction. Dealing with a property of this nature, we would request, review and report on replies to both residential and commercial standard enquiries. Due diligence would be carried out, not only on the existing dwelling, but also on the potential development of the plot, including whether any planning permissions have been secured, and if so, of what nature and to what extent. We would also review and assess to what extent any planning permissions have been implemented or commenced by the current owners. Furthermore, search results would also be considered carefully to ensure there is no adverse impact on any future development and/or plot sale.

   Thinking ahead, once purchased and if developed or additional dwellings are built on the land, we could have a site to “set up” which would turn into plot sales of the individual dwellings. Having first-hand knowledge of the site in this instance is incredibly beneficial and can save time and expense.

   A further example of a “hybrid job” could be the purchase of an HMO (Home in Multiple Occupation). A property used by the occupants as a home but owned by the registered proprietors as a commercial investment. The purchase of an existing or potential HMO has both residential and commercial elements to be carefully considered including planning requirements, health & safety, and fire risk requirements. Again, due diligence would be carried out on both the residential and commercial elements of the property and a full and comprehensive report prepared so that the buyer has the full picture before committing to purchase.

   Aside from the legalities of the transaction itself, is the Stamp Duty Land Tax (SDLT) position. Whilst we are not tax experts we do submit and file returns on behalf of our clients and therefore have a basic understanding of the difference between residential and commercial transactions for SDLT purposes. The devil is in the detail. There is a lot of guidance available from HM Revenue and Customs to assist in ascertaining whether residential rates of SDLT or commercial rates of SDLT apply to the transaction. In some circumstances, we will advise that you take specialist SDLT advice if we consider it appropriate to the type of transaction.

   In short, it is often difficult to decipher what type of transaction a job will be until you are into the detail of it. Kelly’s background in both residential and commercial transactions can bring unique experience and perspective to the job which could save time and cost. Feel free to contact Kelly on 01782 652323 for further detail.

3. Minimum Energy Efficiency Standards (‘MEES’) and Commercial Lease Negotiations

   October 25, 2021 8:34 am Leave a Comment

   Minimum energy efficiency standards (‘MEES’) were introduced by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 and will impact lease negotiations for non-domestic (commercial) private rented property across England and Wales; these regulations require commercial premises to have a minimum energy performance rating which will be demonstrated by an EPC (energy performance certificate).

   How does this impact current lease negotiations?

   Currently, the MEES regulations will only impact new lease negotiations for commercial premises as they prevent a Landlord from letting commercial premises, unless they have an EPC rating of ‘E’ or above. It is worth noting that new leases also include an existing lease which is being renewed.

   It is therefore important to consider whether there is a valid EPC in place for the premises early on in the lease negotiations as, if the EPC does not meet the required standard, energy improvement works may need to be carried out to the premises. Alternatively, if the premises meets the criteria to be considered exempt from the MEES regulations, then the exemption will also need to be registered.

   A Landlord will also need to consider the provisions of the lease in light of the regulations, for instance, how to protect the EPC rating when a Tenant is carrying out alterations, controlling the Tenant’s ability to obtain an EPC and rights of access to carry out energy improvement works in the future.

   How will MEES impact existing leases?

   It will soon be important for Landlords to consider their existing portfolio of commercial premises as from April 2023, Landlords who continue to let commercial premises below an EPC rating of ‘E’ or above will need to carry out energy improvement works.

   If you are a Landlord with a large portfolio of commercial property this could be quite an undertaking to check whether each premises has a valid EPC at the required standard, it may also be a costly exercise updating the EPCs and carrying out energy improvement works, where necessary.

   There may be some instances where the premises qualifies for an exemption from the MEES regulations, but any exemption will need to be registered.

   Who will be responsible for the cost of improvement works?

   The MEES regulations place a statutory burden on Landlords to carry out energy improvement works. However, the terms of any existing or proposed lease would need to be examined to check whether the lease passes this burden on to a Tenant.

   If you are seeking advice and further information on reviewing your Commercial Leases, we have a team of solicitors who have a wealth of experience in dealing with a variety of clients. Our proactive approach, individual skills and team ethic allow us to deliver creative solutions, seamless service and tailored advice even when the pressure is on. Get in touch to find out how our Commercial Property Team can help you.

4. A Guide To: Break Clauses

   September 8, 2021 8:50 am Leave a Comment

   It is common for a lease to include an option for one or both parties to end the lease prior to the contractual expiry date. This is known as a ‘break clause’.

   The lease will indicate whether the break clause is in favour of the landlord, the tenant, or both.   

   Typically, a break clause is exercisable by a tenant either on a fixed date specified in the lease, at any time on or after a fixed date as specified in the lease or upon a certain event occurring.

   Many break clauses also contain pre-conditions such as stating that there must be no rent arrears and that the property must be returned with vacant possession.

   Although the above may appear to be relatively straight forward, there have been a couple of recent cases which help to demonstrate that care must be taken when drafting and understanding break clauses.

   • In 2015 the High Court decision in BNP Paribas Securities Services Trust Company (Jersey) Limited V Marks & Spencer PLC confirmed that rent paid which related to a period beyond the break date did not need to be refunded to a tenant (in this case Marks & Spencer) because the lease did not contain an express provision requiring that to happen. The refund sought by Marks & Spencer, which the landlord was able to keep, was over £1.1m!
     
   • In 2011 the Court of Appeal decision in Ibrend Estates BV v NYK Logistics held that vacant possession means that the property should be empty of people and that any buyer must be able to assume and enjoy immediate and exclusive possession, occupation and control of the property. In this case NYK had retained security at the property and carried out some repair work after the break date. The court held that vacant possession had not been given. 
     

   It is important that any break clause is carefully drafted to ensure that it reflects the intentions of both the landlord and tenant. If a party wishes to exercise a break option, they must ensure that any conditions are satisfied to provide for valid notice.

   If you are a landlord or tenant and you wish to obtain advice in relation to the break clauses or any other lease terms, please contact our Commercial Property Team via our online contact form or by telephone on 01782 262031.