Legal advice: Commercial leases

Can a voluntary code of practice ever work when it comes to setting commercial leases?

By Keith Miller of thePublican.com's team of legal experts from London solicitors Joelson Wilson.​

It should come as no surprise that the code of practice for commercial leases is making slow progress and that the government is making noises about intervening. This is despite the efforts of those in the property industry - and the licensed trade in particular - who have been trying to put their house in order before John Prescott comes knocking on the door.

The commercial reality is that landlords are answerable to their banks and shareholders. Now that merchant banks and venture capitalists have entered the pub investment market with their securitisation and sale-and-leaseback deals there is huge pressure on pub companies to maximise rental income. Credit committees want to know that rental income will not drop and have come to expect upwards-only reviews. The City boardroom and the public bar are poles apart.

Congratulations therefore to Ted Tuppen, chief executive of Enterprise Inns, for speaking out against the upwards-only rent review. As Britain's largest pub landlord, Enterprise is in a strong position to influence attitudes in the trade.

Professional advisers have a duty to their clients to get the best deal possible. They won't be thanked for conceding points which cost their clients money. They can - and do - join with others in the Royal Institution of Chartered Surveyors or the British Property Federation to develop good practice and publicise the code, but that is on the basis of a voluntary contribution.

The other side of commercial reality is that the terms of the deal supporting the whole structure - that is the pub tenancy - must work. If tenant failures increase, as they may do as interest rates and other costs rise, the number of empty premises may become significant, resulting in landlords being in breach of obligations to their banks.

An independent research project is being conducted by a team from Reading University to monitor adoption of the code.

In an article in Estates Gazette, the Reading team recently reported that landlords are now more adaptable in their overall approach to lease terms, but choice is not being sought in respect of rent reviews. Both parties seem to accept that reviews will be upwards-only.

"There is no evidence to suggest that tenants are seeking alternatives to the upwards-only review or will be prepared to pay for any relaxation of this term," it states. The sector which benefits least from the code is small business tenants, because they are often unaware of its existence. Pub lessees are typical of this sector. The Reading group blames an unwillingness to take advice and a lack of property awareness.

It may be more accurate to talk of a lack of accounts awareness, as the deal struck on the all-important threshold rent may rely too much on the landlord's view of trading potential. And in licensed premises the key to that so often relies on the personality and expertise of the licensee - which are very variable factors.

One effect of the new stamp duty land tax may be that shorter leases are granted and upwards-or-downwards rents may enter through the back door. The trend should mean that some tenants will opt to take shorter leases - because longer leases are heavily taxed - but a five-year lease at £25,000 per annum plus VAT, for example, will not be taxable. If these short leases fall within the Landlord and Tenant Act 1954, giving a tenant the right to a new tenancy, the court is able to fix a lower level of rent if the current market rent is lower than rent paid under the expiring lease.

If landlords offer greater choice and flexible leases, tenants may find choosing another model will backfire on them. Index-linked rents might be an option, for instance, but a lease with annual reviews tied to the Retail Prices Index may become expensive in times of inflation.

The code proposes a formula for a review to be upwards or downwards, so long as the rent does not fall below the rent first reserved. So, in a five-year review pattern, the 10th-year review could reduce the rent from that payable in years five to 10, but not below that payable in years one to five. That seems a reasonable compromise.

Hopefully, the Reading group's December report will reveal a trend towards acceptance of the code, but don't hold your breath. In the meantime, if you want more specific advice relating to your own lease you can contact me at km@joelsonwilson.com.

The importance of legal advice​

Many of the queries we receive from readers of The Publican relate to terms of their leases, which represent the contractual terms agreed between them and their landlords.

It is therefore vital that before agreeing the terms of a new lease, or agreeing to take assignment of someone else's lease, tenants know the precise nature of the contract they are entering into. This will directly affect all future dealings with the landlord.

The golden rule has to be to take proper legal advice - preferably from a solicitor experienced in dealing with licensed property issues.