Commercial property glossary

Below are a range of terms you may come across when dealing with a commercial property legal transaction. We hope the brief explanations prove useful and should you need any further advice or help with a commercial property issue don't hesitate to contact us on 0203 816 9303 for a free, no obligation initial chat with one of our legal advisors.

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Alienation 
Alienation provisions generally detail the tenant’s ability to assign or transfer a lease.

Assignee
The person to whom or corporate body to which a lease is assigned. 

Assignment
An assignment of a lease is the transfer of the Lease to a third party who was not the original tenant. This is a complex area. Alienation or assignment provisions in leases can be restrictive and so tenant’s should ensure they receive specific legal advice on these clauses before entering into or taking an assignment of a lease. Assignment of part of the Lease (so simply transfer the Lease for part only of the property) is usually not permitted by the landlord. Most leases now contain the requirement that the outgoing tenant provide an authorised guarantee agreement. 

Authorised Guarantee Agreements 
Authorised guarantee agreements were introduced by the Landlord and Tenant (Covenants) Act 1995 and generally apply to those leases entered into on or after 1st January 1996. 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. Most commercial leases now contain a tenant covenant which requires the tenant to provide an authorised guarantee agreement when the lease is assigned. Under the authorised guarantee agreement an outgoing tenant will act as guarantor for the incoming tenant. If the incoming tenant does not pay the rent or other sums due under the lease or comply with the tenant covenants generally then the landlord can require the tenant to do so. In addition if the incoming tenant becomes insolvent then the landlord can require the outgoing tenant to take a new Lease of the property for a term equal to that remaining under the lease. Authorised guarantee agreements vary from lease to lease. It is important that the outgoing tenant does not remain liable for the tenant covenants longer than is necessary. For this reason tenants should seek specific advice on the contents of the authorised guarantee agreement. 

Break Clause 
A break clause is also sometimes referred to as a break option. It is a clause which enables the landlord or the tenant, but more commonly the tenant, to end the lease before its expiry date. Break clauses usually contain very specific conditions which need to be complied with or fulfilled before the lease terminates. It is important that tenants ensure they comply with these condition as any failure to do may mean that the tenant cannot terminate the lease early. 

Break 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. Some leases contain the wording that needs to be contained in the break notice but some do not. Most leases list what the break notice must contain and so it is important the landlord or the tenant comply with any such requirements. There are often disputes regarding the conditions that surround these notices. The drafting and service of a break notice sound straight forward. In reality, recent cases illustrate that tenants are not applying them correctly.

Change of Use 
Most leases will contain a permitted use (see below). Use clauses relate to the ability of a tenant to change the way land or buildings are used, either as a result of internal or structural alterations or renovation or the business which occupies the property. It can also apply if there is a significant increase in the present use or through a series of subtle alterations which could then be perceived as development. Changes of use require planning permission and often require a landlord’s written consent. In respect of planning permission, not every change planning permission  if the change is still within the same ‘class’ of business use. It may, however, still require the landlord’s written consent. 

Clawback
This is another 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 may 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. The contents of clawback clauses vary. These clauses are complicated and so it is vital they are set correctly. Consideration needs to be given to who carries out the valuation and the factors that should apply to the value or be disregarded , whether it is a one-time only payment or remains over a period of time.. If negotiating a clawback provisions sellers and buyers should seek advice at an early stage.  

Compulsory Purchase
This is the purchase of land or rights normally from an unwilling owner. They are most frequently served by public bodies including local authorities and other government agencies.  An example of where a compulsory purchase order may be served is if a transport development is to be put in place such as new road schemes or an area of development is occurring as a result of it being assessed as being necessary for regeneration. Where these orders are issued the owner may be entitled to compensation. The amount of this compensation is determined by a number of factors.

Covenant
A covenant is a an agreement by a person, company or other body to do something or not to do something (see positive covenant and restrictive covenant below).

Covenantee
The person or body corporate that agrees to comply with a covenant. 

Dilapidations 
This mainly concerns the tenant’s failure to observe certain expressed and implied obligations within the lease, principally concerning the tenant’s failure to observe obligations relating to repair of the premises. If the tenant has failed to comply with its repairing obligations then the repairs that are required are said to be dilapidations. Claims for dilapidations can be raised during the course of 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.

Forfeiture
These provisions relate to the landlords ability to terminate the lease before the term end date. The forfeiture provisions in the Lease will set out the circumstances in which the landlord is able to forfeit the lease. These commonly include when a tenant is in breach of the covenants in the lease, has not paid the rent for a certain number of days or is insolvent. In these situations the landlord may have right to forfeit the lease and end the agreement. However, this must be done in compliance with the Law of Property Act 1925. 

Heads of Terms 
The principal purpose of heads of terms is to identify and define briefly what terms the seller and the buyer of the property or the landlord and tenant have agreed. There are a number of advantages of using the heads of terms. By outlining theses terms both parties understand what they have agreed to before work is commenced (and so costs incurred) in drafting the more detailed documents. Even though heads of terms contain details of the transaction they rarely commit the parties listed to the transaction. Heads of terms can include the following subjects: 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. 

Incoming Tenant
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 
This applies to a lease which is not a full repairing lease (see above). Instead of being responsible to repair the entire property, the tenant only has to repair the internal areas of the property e.g. carpets and paint work. Generally the landlord will be responsible for maintaining the structural external parts but this is not always the case. Tenants should ensure the lease contains a specific obligation on the landlord to repair the building. In some case the level of rent payable by the tenant will be higher to reflect the lower repair obligations being faced by the tenant.

Landlord and Tenant Act 
The Landlord and Tenant Act 1954 (the Act) is split into 2 parts. Part I deals with residential tenancies however part II is considered the part of the Act that covers business tenancies. Part II of the Act gives business tenants a degree of security with regards to their tenancy. It provides 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. Assuming 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. There are clear parameters around when the Act applies and there are a number of exemptions so expert advice should be sought. Tenancies can be excluded from the protection afforded by of the Act. Tenants should be aware of the implications of this at an early stage. 

Lease Security
This is also known as a “security of tenure” and is provided by the Landlord and Tenant Act 1954 and the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003. For tenants to a have rebuttable right to remain in occupation even though their lease has come to an end a grant of security of tenure will need to be present in the lease drawn up under the Landlord and Tenants Act. If the security of tenure is excluded from the lease at the outset the tenant has no right to remain in the property. Landlords who are seeking to take back their property at the end of the lease should consider making this exclusion. If exclusion of the Act is not made and security of tenure exists the landlord can only seek to remove the tenant at the lease end date by serving a Section 25 Notice and in that notice demonstrating certain limited circumstances. 

Lessee
The tenant

Lessor 
The landlord

Licence
There are various forms of licence. It is legal permission to do something. Common examples in respect of leases are a licence to alter (so permission to carry our alterations to the premises) or licence to assign (permission to assign the lease to a particular assignee). An alternative example is is consent to carry out a business activity that may have been previously prohibited from premises. For example, permission for the selling of alcohol from a business premises is known as a premises licence.

Overage 
Also known as claw back or uplift clause (see clawback).

Outgoing Tenant
The current tenant who is assigning the lease. The outgoing tenant will assign their lease to the incoming tenant. 

Option to Purchase
An option to purchase is a right or option given by the seller of a property or the landlord to an intending purchaser  or tenant to buy the property at a specified price within a specified period of time (the validity period of the option). The intending purchaser must pay a fee for this right or option. The intending purchaser or tenant has to exercise the option to purchase within its validity period if they decide to buy the property.

Notice to Quit
Notice by the landlord to the tenant to vacate the property. Landlords should note that notices to quit can only be used in certain circumstances. 

Permitted Use
Most leases contain a use or permitted use clause. This clause will restrict specifically what the property may be used for. It is important tenants consider such clauses carefully. 

Positive Covenant
An obligation 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. 

Restrictive Covenant
A restrictive covenant is a clause that imposes 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. 

Schedule of Condition 
A record of the condition of the premises at the start of a lease. This is often attached to the lease and referred to in clauses relating to the state of repair and condition of the building and are particularly important in those that refer to the state of the building when it is handed back to the landlord.

Schedule of Dilapidations
A list of repairs and maintenance required by the landlord. This schedule is prepared with reference to the lenant’s repair covenants outlined in the lease. It is often issued by the Landlord at the end of the lease (terminal schedule of dilapidations) where the tenant is required to carry out works or pay compensation or during the term of the lease (interim schedule of dilapidations) where the landlord requires repairs to be carried out. .

Section 25 Notice
A Section 25 Notice is prepared by the Landlord and served on the tenant where the tenant has lease security. It is served towards the end of a tenancy or after a tenancy has expired and is used to inform the tenant whether or not the landlord agrees to the grant of a new lease. If the landlord agrees to a new lease the notice will set out in brief the landlord’s proposed terms for the new lease. If the landlord does not agree to a new lease then the notice must state the reason why (refer to Landlord and Tenant Act 1954)

Section 26 Notice
A Section 26 Notice is prepared by the tenant and served on the landlord where the tenant has lease security. It should be served before the end of a tenancy and is used to inform the landlord that the tenant requires a new lease for the property.

Surrender
An agreement between the landlord and the tenant that the lease will end before the term end date. 

Term
The length of time the lease will be in place or run.

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