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When you enter a new commercial lease, you may encounter some terms in the lease agreement whose meanings you are unsure of. It is important that you understand all the terms in your commercial lease agreement. Otherwise, you could breach your legal obligations under the lease. This article explains four key property terms for commercial leases.
1. What is ‘Alienation’?
Alienation is when a commercial tenant ‘disposes’ of their interest in land. In other words, alienation gives a tenant the right to:
- sublet; or
- impose a charge on the commercial property.
We explore these three terms in the table below.
|An assignment is where a tenant assigns and transfers their lease to a third party. The third party becomes the commercial tenant, which means they take on the lease obligations in the lease agreement.
|An underlease is where a tenant sublets the commercial property to another third party who becomes the sub-tenant. The commercial lease is the head lease, and the new sub-tenant signs a separate lease agreement with the primary or head commercial tenant. A tenant may sublease part or all of the commercial property, particularly when they do not want to assign the commercial premises.
|A charge is where a commercial tenant charges their interest in the commercial lease. They will do this to a lender such as a bank as a means to raise finance.
2. What is an FRI Lease?
An FRI lease is a full repairing and insuring lease. This means that a commercial tenant is responsible for all the costs for repairs and insurance of the commercial property.
An FRI lease can be direct or indirect. Where it is a direct FRI lease, the commercial tenant will directly pay for the insurance and repair costs. This is usually the case where a commercial tenant leases an entire property from the landlord.
An indirect FRI lease is one where the commercial landlord will directly pay repair and insurance costs, but the tenant reimburses them via a charge between the two parties, such as insurance rent.Continue reading this article below the form
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3. What is the Lease Code and RICS Service Charge Code?
Commercial leases are legally binding contractual agreements between a landlord and a tenant. However, they must also comply with parts of UK property law. Two codes can affect commercial leases, although these are not legally binding.
The Lease Code refers to the Code for Leasing Business Premises in England and Wales 2007. Since the Lease Code, it is up to commercial landlords whether they wish to abide by it. However, it is reasonable for a commercial tenant to expect their landlord to comply with the Lease Code.
The Royal Institute of Chartered Surveyors Code of Practice for Services Charges in Commercial Property (‘RICS’) is also a code, so it is not legally binding. However, the RICS is in place to try to ensure fairness between commercial landlord and their tenant. It is, therefore, a best practice that a landlord follows it.
4. What is a Service Charge?
The service charge is the cost a commercial landlord charges the tenant for the service they provide as part of the commercial lease. The service will be to the overall property such as to the communal areas. It may include costs, for example, for:
- decoration; and
- providing staff such as security staff.
Landlords typically charge a service charge when they lease parts of the property as multiple separate commercial leases. Therefore, you are likely to see service charges for:
- units in a shopping centre;
- offices in an office building; and
- a commercial estate.
This cheat sheet outlines what you should be aware of in your lease agreement.
If you enter a commercial lease in the UK, you will need to understand the property jargon terms within it or associated with it. For example, alienation gives a tenant the right to assign, sublet or impose a charge on the commercial property. Additionally, FRI leases refer to leases where the tenant must bear the cost of repairs and insurance to the commercial property. Moreover, the Lease Code and RICS Code may be binding in a leasing agreement. Finally, a service charge is a charge a tenant may pay a commercial landlord for services the latter carries out, and an FRI lease is a full repairing and insuring lease, which means the tenant picks up these costs.
If you need help understanding property terms in a commercial lease, LegalVision’s experienced leasing lawyers can assist 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 for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
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