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When commercial landlords and tenants enter a lease agreement, their relationship may not go as planned. Instead, issues may arise, resulting in a lease dispute. This article will discuss why fit-out issues are a common cause of lease disputes.
Lease Disputes
A lease dispute is where a landlord and tenant cannot agree on an issue concerning their lease agreement. A lease dispute can arise for a number of reasons. Typical areas of a commercial lease which have resulted in a dispute include:
- dilapidations;
- rent arrears; and
- forfeiture.
Commercial lease disputes can be both time-consuming and can damage your relationship with the other party to the lease.
Fit-Out
A fit-out in a commercial lease can be an area subject to a lease dispute. A fit-out is where the interior of the commercial property provided by the landlord as the ‘shell and core’, is made suitable for the tenant’s occupation. This allows them to carry out their business activity. It can include, for example:
- electrical work;
- mechanical work;
- decorating; and
- arranging furnishing.
A Cat A fit-out is where the landlord provides a blank canvas and instals the basic needs of the tenant. On the other hand, a Cat B fit-out is where the tenant makes alterations to the interior commercial property to make it into their commercial premises.
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Fit-Out Issues
What comprises a ‘fit-out’ will vary between commercial premises. Fit-outs may vary as they depend on the nature of your business and the commercial property details. A fresh coat of paint or more significant structural changes to the layout of the premises may constitute a ‘fit-out’. Therefore, a fit-out in a lease dispute will likely raise a range of issues.
Pre-conditions
Most commercial leases will refer to conditions a tenant has to satisfy before carrying out alterations for their fit-out. These may not apply to all fit-outs. The pre-conditions will vary and depend on the extent of the fit-out you wish to carry out. They can include, for example:
- the landlord approving plans;
- the need to get a licence; and
- payment of legal costs for the above for the landlord.
A tenant failing to carry these out correctly could lead to a lease dispute.
A landlord and tenant may also make an agreement about the fit-out. If so, they should document them as a record. You should also take legal advice to minimise the chances of a future lease dispute. This could be over unintended obligations you may incur as part of the lease agreement.
Occupation
As a tenant, you may want to carry out a fit-out to a commercial property before the lease starts. In which case, you may occupy the premises before the lease commences so you can make the modifications to the property. Subsequently, you may be involved in a lease dispute as there is no clarity regarding the legality of your presence. Therefore, to avoid a lease dispute of this nature, you and the other party must be aware of this issue. You and the other party may consider a licence or tenancy at will to resolve any future issues.
Rent
Before you enter a commercial lease, you may require the property to undergo an extensive fit-out. This is typical for some types of businesses, such as:
- a shop;
- a restaurant; or
- an office.
Where this is the case, the tenant may try to negotiate a rent-free period at the start of the commercial lease. If a landlord refuses this, it may create a poor relationship between the two parties. This will likely pave the way for a potential lease dispute in the future.
Restrictions
As a tenant, you must comply with any stipulations in your lease agreement when carrying out a fit-out to the commercial premises. These should be under the alterations clause, but other conditions could affect this. These conditions are likely found in the different lease provisions.
A tenant must follow any legal restrictions on their fit-out wishes. For example, you may need planning permission for new shop signage. Additionally, you must ensure any changes comply with the fire safety and building Regulations.
Where a commercial tenant fails to adhere to the restrictions in the lease, a lease dispute could occur, and they will be in breach of the lease. However, a landlord may have made the conditions clear enough in the lease agreement, which could lead to a disagreement about whether or not the tenant is, in fact, in breach of the lease.
Rent Review
When a tenant carries out a fit-out, this may improve the commercial property’s condition. If so, it could raise its market value. Depending on your lease agreement, it may include a rent review provision. Importantly, your landlord should not include the effects of the fit-out in the rent review assessment. Otherwise, your rent would likely increase, which would be unfair as you have incurred the fit-out costs.
If your lease agreement does not expressly prohibit this, your landlord may raise the rent to account for the fit-out changes. This could lead to a lease dispute where the tenant refuses to pay the rent. If you do not pay rent, this will likely lead to a dispute of rent arrears.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
If you, as a commercial tenant, carry out a fit-out at the start of a commercial lease, this could raise issues. These issues could pave the way for a lease dispute. Your commercial lease agreement, as such, should be explicit when it comes to provisions relating to fit-outs. If your lease agreement is unclear at all, this may lead to a lease dispute. For example, if your lease agreement does not expressly prohibit this, your landlord may raise your rent following a fit-out. This would be disadvantageous for you as you have likely borne the fit-out costs. Similarly, a lease dispute may arise if you, as a tenant, do not comply with the conditions regarding alterations to the commercial property.
If you need help understanding why fit-out issues are a common cause of lease disputes, contact our experienced leasing lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A fit-out is where a commercial tenant changes the commercial property’s interior to ensure it is suitable as their commercial premises.
An issue that could cause a lease dispute due to a fit-out is if the tenant does not comply with the conditions of a fit-out as the lease agreement details.
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