As the UK adapts to new ways of working, so commercial landlords and tenants are adapting to the new economic and market conditions they face.
For landlords, the main consideration when seeking to let a commercial property will continue to be a tenant with a strong covenant, providing a reliable rental income who will protect the property physically and reputationally throughout the lease term.
For tenants, Covid-19 presented new and unforeseen challenges both in relation to the prevention of occupation of their property and how the pandemic affected their business and the economy. How will businesses respond if faced with such difficult operating conditions again? Use clauses in commercial leases have an important role to play in future-proofing a tenant’s business.
The use of a property is governed by many factors. These include statutory planning designations, matters contained on the legal title, requirements and impositions imposed by a lender and the use clause contained in the lease.
The use clause defines how a tenant may (or may not) use a property. It can be either a restriction (stating what can’t be done) or a prescription (stating what must be done). The exact provisions will be negotiated between the parties at the outset and the terms will be dictated by the intention and bargaining strength of the parties.
The effect of the Use Clause upon other clauses in a lease:
1) Alterations: Do the alterations rights allow the tenant to alter the property for the initial use and also accord with the provisions of the use clause? For example, a clause which is broad and allows diverse use will be of little practical use if the lease also contains an absolute prohibition on alterations which may be required to make the property suitable for other uses. It is difficult, if not impossible, for a tenant to predict what the future may entail but it would certainly be prudent to ensure that the alteration clause enables the enjoyment of the initial use and also foreseeable future uses. In certain circumstances, the tenant may be able to use section 19 of the Landlord & Tenant Act 1927 to improve the tenant’s position as the act may, where the landlord’s consent is needed for improvements, imply that consent is not to be unreasonably withheld and also, the act contains a mechanism for the tenant to carry out improvements even the lease says it cannot carry out any alterations.
2) Alienation: Subject to the express provisions of the assignment or underletting clause, a broad use clause will make a commercial lease far more marketable for a tenant seeking to assign or underlet their interest than the same lease with an extremely restrictive use clause.
3) Rent Review: Whilst current market conditions and economic uncertainty have resulted in and may continue to result in the incorporation of more turnover rents, flexibility in relation to the tenant’s covenants in the lease could have a significant impact for either party at an open market review. A broad, “tenant friendly” use clause will most probably result in a higher rental increase at review than a lease with a very narrow use clause with an absolute prohibition against change of use.
That said, the commercial lettings market does appear to be moving to shorter lease terms and more frequent break opportunities which may circumvent the application of the rent review clause.
The RICS Code for Leasing Business Premises came into effect on 1st September 2020 and gives guidance as to best practice for RICS agents, members and regulated firms. The Code simply states that a landlord’s control of use should be no more restrictive than is necessary to protect the property or (adjoining property owned by the landlord).
- A wide use clause brings flexibility for tenants…
- but can be frustrated by a restrictive alterations clause and…
- …. may produce a higher rent on review.