Commercial property literature can often contain jargon-heavy content laden with abbreviations.
Below we explain some of the most frequent and confusing commercial property terms to help you read legal documents at ease in the future. We hope the brief explanations prove useful and should you need any further help on a commercial property issue, don’t hesitate to call one of the team.
The requirements of the contract must be met in full. You may see ‘absolute compliance’ in a break clause, which means certain conditions must be met in order to bring the lease to an early close.
A commercial property agent acting on your behalf can negotiate appropriate lease terms or freehold conditions, based on their market expertise. They can also ensure that you only receive details of properties that are suitable for your particular requirements and they can adopt a role that prevents direct contact between the vendor and the purchaser.
When referred to in your contract they dictate how much or how little you can modify the premises; for example, adding partition walls, replacing the electrics or changing the interior décor.
Alienation provisions generally detail the tenant’s ability to assign or transfer a lease.
The person to whom or corporate body to which a lease is assigned.
This is similar to alienation and denotes the transfer of the Lease to a third party who was not the original tenant. Alienation or assignment provisions in leases can be restrictive and so tenants should ensure they receive specific legal advice on these clauses before entering into or taking an assignment of a lease.
Authorised Guarantee Agreements
On the assignment of a lease the outgoing tenant is released from the tenant covenants in the lease once the assignment has been completed. This poses problems for a landlord as the tenant could assign the lease to an unscrupulous tenant who cannot pay the rent. These agreements generally apply to those leases entered into on or after 1st January 1996. Most commercial leases now contain a tenant covenant which requires the tenant to provide an authorised guarantee agreement when the lease is assigned.
An agreement made between the person leasing the premises and the vendor to bring the lease to an early end, usually by providing written notice.
When exercising a break clause or option the tenant generally needs to serve a break notice. This is the formal notification from either the landlord or the tenant that they want to end the lease. Most leases list what the break notice must contain and so it is important the landlord or the tenant comply with any such requirements.
The tax payable on commercial property which is assessed in a rating list. To obtain details of your rateable value, contact the local authority in which the building is located in and provide the address including post code.
Change of use
Altering the way in which the premises are occupied. There are scenarios where changing the use will not require consent by the local authority, for example, a sandwich shop changing to a hairdresser (both are classified under A1 Shops). However significant changes (e.g. changing a residential property to a business premises), will require full planning permission.
A term for overage or uplift. If you are selling a property or some land, it can be possible to include provisions in the documents under which you sell the property which state the Buyer will be required to make a payment to you if, in the future the land or property gets planning permission or is developed and as a result of this increases in value. Sellers and buyers should seek advice when negotiating clawback provisions at an early stage.
An agreement or promise. In terms of a lease, it refers to the obligations of both tenant and landlord.
This is an acquisition in accordance of interests in land or rights, by a public or private body (usually a local authority or government department), empowered to do so by an Act of Parliament and authorised so to do by an appropriate Compulsory Purchase Order. Such a process entitles the purchaser to deprive the owner or occupier of their property, upon payment of compensation, as provided for by statute. There are several rules and regulations governing the assessment of compensation, which not only relate to the value of the land and buildings, but also losses arising from disturbance, severance and injurious affection and in circumstances where no land is taken.
The tenant’s failure to observe obligations relating to repair of the premises. Claims for dilapidations can be raised during a lease (as are usually contained in an interim schedule of dilapidations) but are more commonly raised at the end (and so are usually contained in a terminal schedule of dilapidations).
Full Repairing and Insuring
Many leases are said to be full repairing and insuring or FRI. This means that the tenant will be responsible for all repairs to the property (both internally and externally) and also to refund to the landlord the cost of insuring the building.
Someone who will value the property but who is acting purely on a 3rd party basis, with no connections to landlord or tenant.
If the tenant fails to pay the rent or breaches the terms of the lease, the landlord has the right to forfeit. In simple terms, this means they can end the tenancy, as long as they comply with section 146(1) of the Law of Property Act 1925.
The ground lease is granted at a ground rent and requires an initial payment. On average, a ground lease lasts from 30 years to 999 years.
Heads of Terms
A document identifying and defining what terms the seller and the buyer of the property or the landlord and tenant have agreed. Even though heads of terms contain details of the transaction they rarely commit the parties listed to the transaction. They can include details of seller and the property purchaser (or the landlord and the tenant), the address of the property, the purchase price or rent to be paid, payment information and special conditions.
The new tenant who is taking on or entering into the lease. The incoming tenant will take an assignment of a lease from the outgoing tenant.
Internal repairing lease (IRL)
The landlord is responsible for external repairs in this type of lease. It’s also their responsibility to take on the costs of these repairs which may result in higher rent being charged.
The Landlord and Tenant Act 1954 (the Act) is split into 2 parts. Part I deals with residential tenancies and part II is the part of the Act that covers business tenancies. It states that a qualifying business tenancy will not automatically come to end upon the expiry of the fixed term of a lease provided the tenant remains in occupation for the purposes of a business. If the tenancy is not brought to an end by agreement between the parties (i.e. surrender) or forfeiture (see below), the tenancy will only come to an end if it is terminated in one of the limited ways specified by the Act. For a more detailed explanation of this law, read our guide here.
To make certain changes to the property, you may have to seek ‘landlord’s consent’, which usually means formal written permission.
This is the statutory right to renew any lease of premises occupied by a tenant for a business use. It is provided for by The Landlord and Tenant Act 1954. One way to exclude the statutory right to a new lease is for the parties to agree to ‘contract out’ of the procedure.
The legal permission to do something. There are various forms of licence; common examples in respect of leases are a licence to alter (so permission to carry our alterations to the premises) or licence to sell alcohol, known as a premises licence.
Mediation is the ideal way of resolving disputes and seeks to avoid cases being taken to court. It involves an independent mediator, who attempts to resolve the situation between both tenant and landlord.
Net yield consists of the profits generated from purchasing or renting a property, minus the costs involved.
If a property is regarded as being ‘premium’, either in terms of its location or condition, then it may be referred to as a ‘prime investment’.
A duty on the covenanted to specifically do something. The most common example of a positive covenant is an obligation on the covenantee to pay a monetary sum.
A person who has a recognised formal qualification to perform a certain task related to a property instruction. There are various qualifications, but the most well-known is a Member of the Royal Institution of Chartered Surveyors (MRICS). A qualified surveyor would normally be employed to deal with any formal property matters such as a valuation for loan purposes, landlord and tenant transactions, building surveys, construction cost estimates and acting as an Expert Witness in Arbitration or Court Proceedings.
A clause that enforces a restriction on the covenantee i.e. they must not specifically do something. Common examples of a restrictive covenant are not to use land for a certain purpose or not to erect a building on the land to enable the value and use to be preserved.
Usually, the landlord will review the rental rate every five years (against the current market plus the value of the property, or the Retail Price Index).
The tenant must pay the service charge in exchange for services provided by the landlord; such as maintenance and repair of the building, plus management (in some cases).
This term refers to a range of improvements that a tenant can legally make (at their own cost), without seeking permission from the landlord.
This refers to the length of time granted to the tenant to rent out the premises. Some premises are short-term (i.e. six months or less), others are long-term (at least a year).
All commercial property is given a use class, unless it is ‘sui generis’ which means a unique use that doesn’t fall into any of the established categories, such as a theatre or nightclub. Here are the basic use classes:
Shops, hairdressers, travel and ticket agencies, retail warehouses, undertakers post offices, pet shops, sandwich bars, showrooms, domestic hire shops, dry cleaners, funeral directors and internet cafes.
A2 Financial and professional services
Financial services such as banks and building societies, professional services (other than health and medical services) and including employment and estate agencies. Does not include betting offices or pay day loan shops - these are now classed as “sui generis” uses (see above).
A3 Restaurants and cafés
This applies to restaurants, snack bars and cafes, where there is the sale of food and drink for consumption on the premises.
A4 Drinking establishments
Wine bars, public houses, or other drinking establishments not including night clubs, including drinking establishments with expanded food provision.
A5 Hot food takeaways
For the sale of hot food for consumption off the premises
Offices (other than those that fall within A2), research and development of products and processes, light industry appropriate in a residential area.
B2 General industrial
This is use for industrial process other than one falling within class B1 and does not include premises used for chemical treatment, incineration purposes, landfill or hazardous waste.
B8 Storage or distribution
This class includes open air storage.
Hotels, guest and boarding houses where no significant element of care is provided (excludes hostels).
C2 Residential institutions
Hospitals, residential care homes, nursing homes, boarding schools, residential colleges and training centres.
C2A Secure Residential Institution
This is use for a facility of secure residential accommodation, including use as a prison, detention centre, secure training centre, young offenders’ institution or as a military barracks.
This class is formed of 3 parts:
- C3(a) covers use by a family, single person, an employer and domestic employees (such as a nanny or gardener or personal assistant), a carer and the person receiving the care and a foster parent and foster child.
- C3(b): up to six people living together as a single household and receiving care e.g. supported housing schemes such as those for people with learning disabilities or mental health problems.
- C3(c) allows for groups of people (up to six) living together as a single household. This allows for those groupings that do not fall within the C4 HMO definition, but which fell within the previous C3 use class, to be provided for i.e. a small religious community may fall into this section as could a homeowner who is living with a lodger.
C4 Houses in multiple occupation
Small shared houses occupied by between three and six unrelated individuals, as their only or main residence, who share basic amenities such as a bathroom or kitchen.
D1 Non-residential institutions
These are creches, clinics, health centres, day nurseries, schools or church halls as an example. Non-residential education and training centres.
D2 Assembly and leisure
Music and concert halls, cinemas, bingo and dance halls, but not night clubs. They can also include swimming baths, skating rinks, gymnasiums or area for indoor or outdoor sports and recreations (except for motor sports, or where firearms are used).
Value Added Tax
A tax in the United Kingdom that is levied on the supply, actual or notional, of certain goods and services.
This tax will be payable by the tenant in addition to the rent paid for the demised premises, unless the landlord has elected to charge VAT on their property.
If the tenant is VAT registered, in most cases they will be able to recover the amount charged from Customs & Excise.