Renewing or restructuring a lease in 2012?
Here’s something to think about.
Both a landlord and a tenant should pay special attention to the physical state of the premises to be included in a lease. This is usually a top concern to both parties when entering into a new lease but in my experience this is very often overlooked by landlords, tenants, their agents and advisors alike when renewing a lease. At that stage, the parties tend to focus on such things as the amount of the rent, service charge caps and break clauses. They don’t tend to think about the physical state of the premises or the future implications on a potential terminal dilapidations claim at the expiry of the new lease. But they should! Why?
The premises originally leased may be out of repair, in need of decoration or may have been extensively altered. If both parties were to be asked whether the current premises were exactly what was now to be kept in repair and delivered up at the end of the renewed term, they would probably both say “no”. This is precisely the issue. The parties tend to assume that the new lease covenants relate to the premises that were demised by the original lease. This is not so. The premises being leased by the new lease is the property in the physical state that exists when the new lease is entered into, unless the parties specify otherwise. The consequences of this can be serious for either party.
For example, the tenant could find that its own fixtures and fittings which it installed during the original term (e.g. air conditioning, lighting systems and suspended ceilings etc) have now become part of the demise as landlord’s fixtures and fittings and in the new lease are subject to the covenant by the tenant to keep them in good repair and condition and to yield them up as part of the premises at the end of the term of the lease.
Conversely, the landlord might not be able to require reinstatement. During the term of the original lease the tenant may have carried out substantial alterations, particularly if the premises were originally let as a core or shell and the landlord might want the premises to be reinstated at the end of the term. Once the original lease expires, then the demise of the premises under the new lease will be those that specifically exist at the date of grant of the new lease, namely the premises in their altered state. Unless steps are taken to protect the landlord, the landlord may lose its ability to require reinstatement. Often, the landlord’s claim for dilapidations at the end of the lease may succeed or fail on its ability to make the tenant reinstate, so not being alive to this point could have a serious financial impact on both parties.
These issues can easily be addressed. It is simply a question of thinking about the issue and then spelling out the precise intentions of the parties in the new lease. The new lease can set out precisely:-
- What constitutes the demised premises.
- How the premises let differs physically from what actually then exists.
- Works or repairs required to bring the premises up to the agreed standard of repair and condition.
- The exclusion of specific tenant’s fixtures and fittings.
- The position with regard to reinstatement of alterations carried out during the previous lease.
My message is please pay special attention to the physical state of the premises when renewing or restructuring a lease.
This article contains information of general interest about current legal issues. It does not give legal advice and specific advice should always be sought about your particular circumstances. We will be happy to assist.
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