Commercial property leases

 February 2017

Fact sheet no. BDL01 EW Commercial property leases

Use this fact sheet to:

  • negotiate with your landlord if you want to end your lease;
  • find out how your landlord can end your lease if you fall behind with your rent; and
  • find out what your landlord can do to get back unpaid rent.

What is a lease?

Warning:

breaking terms and conditions

A lease is a legal agreement. If you break its terms and conditions, your landlord will usually have the right to end the lease and take court action against you.

A lease is a legal agreement, drawn up in writing, which allows you to occupy and use a property for a certain length of time. The terms and conditions of the lease will describe the rights and duties that you and the owner of the property have. For example, the lease should state how much rent you have to pay. It should also state what services the owner should provide to you. We will use the term ‘landlord’ to refer to the owner of the property that you have a lease agreement for.

This fact sheet gives information about leases for business premises.  We describe:

  • what options you may have if you want to end the lease;
  • what you can do if you cannot afford to pay your rent; and
  • the actions that your landlord can take if you have fallen behind with your rent payments.

If the lease is drawn up using the rules set out in the Landlord and Tenant Act 1954, then the legal rights you and your landlord have are set out in that Act. If you choose to sign a lease that does not follow the rules set out in the Landlord and Tenant Act 1954, then the rights set out in that Act will not apply to you. The law about lease agreements is complicated. We can give you guidance on how to check whether your landlord has followed the correct rules. Contact us for advice.

What should I do before signing a lease?

Extra advice:

limited company directors

If you are the director of your own limited company and the lease is in the name of that company, check to see if you have personally guaranteed the rent payments. A personal guarantee means that you are personally liable for the rent if your company does not pay it.

Before signing a lease, check the agreement carefully to see:

  • what your rights and duties are; and
  • what your landlord’s rights and duties are.

These rights and duties are sometimes known as ‘covenants’.

Your agreement will tell you how much rent you have to pay.  Check what is meant by the term ‘rent’ as this may include insurance costs and service charges (money you have to pay for the services the landlord provides).

See our fact sheet:

Limited companies.

contact us for advice    

The Code for Leasing Business Premises

The Code for Leasing Business Premises can be found at www.leasingbusinesspremises.co.uk. In this fact sheet we will refer to it as ‘the lease code’.

Information:

voluntary code

Landlords do not have to follow the lease code. This is because it is a voluntary code of practice. Check if your landlord follows the lease code before signing the agreement.

The lease code sets out:

  • the types of terms and conditions that your lease should contain; and
  • how the landlord should deal with you about matters relating to your lease agreement.

Under the lease code:

  • your landlord should make the terms and conditions of the lease agreement clear to you;
  • your landlord should give you clear information about the costs of leasing the property;
  • the lease should make it clear when and how your rent can be increased, and how long your agreement lasts;
  • the lease should tell you whether you have any rights to end the lease agreement early and what happens when the lease agreement comes to an end; and
  • the lease should make clear the other rights and duties of you and your landlord.

Negotiating with the landlord

Information:

self-help pack

Our self-help pack includes further information on types of debt, guidance on completing a budget and how to negotiate with creditors. Contact us for a copy.

If you are struggling to pay the rent on your business premises, contact your landlord as soon as possible. Try to make an arrangement to pay your ongoing rent and any missed payments that you can afford and that your landlord will agree to. If you have fallen behind with your rent payments, this will usually involve paying your ongoing rent plus an amount towards the arrears. You will usually need to treat business rent arrears as a priority debt. This is because your landlord could take steps to end your lease agreement if you do not make an arrangement that they agree to.

You may wish to try to re-negotiate the rent payments with your landlord.  If the property is likely to be difficult to rent out to someone else, your landlord may agree to reduce the rent for a certain period of time.

If you cannot re-negotiate better terms, then you may have to consider whether you can:

  • end the lease (see the next section on Break clauses for more information); or
  • pass the lease on to someone else by 'assignment' or 'sub-letting'. For more information see Assignment and subletting.

Break clauses

Extra advice:

check for a break clause

Check your lease agreement to see if you need to give your landlord advance notice that you want to end the lease at a breakpoint.  If there is a notice period, make sure that you give this to you landlord in writing and in good time.

Assignment and subletting

Extra advice:

check your right to assign or sublet

Check your lease to see whether you have the right to assign or sublet the lease. Also, check whether any other conditions apply. For example, your lease may state that your landlord’s agreement is required before you can go ahead. You may need help from a solicitor to draw up the paperwork. You will usually be charged for the services they provide. Contact us for advice about how to search for a solicitor who may be able to help you.

The lease may allow you to ‘assign’ the lease. This would mean that you allow someone else to use the property and they would pay rent to the landlord.

The lease may also allow you to ‘sublet’ the property. This would mean that you rent all or part of the premises to someone else (a ‘sub-tenant’). You would need to create a new agreement between you and the person who sublets the property. This is often known as a ‘sublease’.

If you choose this option, you are still liable to pay your rent to the landlord. However, the tenant that you sublet to would pay you for being able to use the premises. This can then be used towards payment of your own rent. If you do sublet your premises, it is a good idea to make sure that the sublease ends before the date your own lease ends, or before a breakpoint.

Warning:

rent payments

If the person that you assign a lease to does not pay the rent, you would usually still be liable to pay any arrears and future payments.  Check the terms and conditions of your lease agreement to see what it says about assigning the lease.

Early surrender of lease

Your landlord may agree to your lease ending early. However, they may want you to pay them a lump sum of money before agreeing to this. You may wish to get advice from a solicitor to make sure your rights are protected when your lease ends early.  Contact us for advice about how to search for a solicitor who may be able to help you.

What happens if I miss my rent payments?

If you do not pay your rent then your landlord can take further action against you. Your landlord could:

  • try to seize goods using a bailiff (this is known as commercial rent arrears recovery);
  • take steps to end your lease agreement and repossess your premises (this is known as forfeiture);
  • make a money claim through the County Court to get a county court judgment against you (see the later section Court action to recover the arrears); or
  • petition for your bankruptcy (see the later section Bankruptcy).

In the next sections we describe each of these types of action and what your rights are.

Commercial rent arrears recovery 

Information:

changes to bailiff law

On 6 April 2014, the law on bailiffs changed. The information in this fact sheet is based on our understanding of the new rules. Some bailiffs may interpret the new rules differently. It is not yet clear how the new rules will be applied in practice. If you are unsure whether a bailiff’s actions are legal, contact us for advice.

Bailiffs are also commonly known as enforcement agents. In this fact sheet we use the term bailiff.

A bailiff acting on behalf of your landlord can enter your business premises to try to ‘take control of goods’ at those premises. The amount of rent that you owe must be equivalent to at least seven days’ worth of rent for the landlord to be able to do this. The process is known as ‘commercial rent arrears recovery’ (CRAR).

‘Rent’ means the rent you pay, plus interest and VAT. It does not include service charges, business rates, insurances, or any other extra charges.

There must be a written lease in place before CRAR can be used. It cannot be used if the lease has been ended by forfeiture or in certain other cases. Contact us for advice.

CRAR cannot be used if any part of the premises is used for residential purposes. For example, it cannot be used for shops with flats above that are part of the same lease.

Information:

CRAR only used for rent

The landlord can only use CRAR if you fall behind with rent payments. They cannot use it if you break other terms and conditions of your lease.

If the landlord cannot use CRAR, they could take court action against you to recover the arrears. See the later section Court action to recover the arrears.

The bailiff should attempt to gain entry to your premises peacefully. You do not have to let them in.

They should only enter using a normal method of entry such as a door or loading bay, not windows.

Bailiffs can call between the hours of 6am and 9pm. However, they can call outside of this period if your business is open outside these hours, for example, if you run a bar or nightclub.

Extra advice:

vehicles

Bailiffs can remove a vehicle if it is parked on your own driveway or on a public road. They cannot remove a vehicle on third party premises (for example someone else's driveway or a private car park) unless they have a court order allowing them to do this.

Taking control of goods may mean that:

  • goods are left on your premises whilst you make agreed payments or until the rent arrears are cleared (known as a ‘controlled goods agreement’);
  • goods are removed and sold at auction to repay what you owe; or
  • goods are locked up in a room or outbuilding on the premises. As a last resort bailiffs may lock up the whole of the business premises.

The bailiff acting on behalf of your landlord has to give you seven clear days’ notice that they intend to take control of your goods. They can visit your premises in the meantime but cannot take control of your goods until seven clear days has passed. ‘Clear days’ do not include Sundays and bank holidays. Also, bailiffs do not have to give you time to pay before removing goods from the premises. However, you may be given a chance to pay if your landlord thinks they may get their money back more quickly.

If you break the terms of a controlled goods agreement, then a bailiff must give you at least two days’ written notice that they intend to return and remove goods.

Goods can be sold seven clear days after they have been removed, unless you have already paid what you owe. You must be sent a notice telling you how much the goods have been valued at and details of where and when they are due to be sold. This will usually be by auction. Contact us for advice.

What goods can be taken?

The bailiff should not take:

  • tools, books, telephones, computers, vehicles and other items of equipment that you personally need to use in your job, business or education (up to a total value of £1,350); and
  • items you or someone else is physically using, where taking the goods is likely to lead to a breach of the peace. This would normally only apply if the bailiff wanted to immediately remove the goods.

If a bailiff takes control of goods that are exempt, you can make a court claim for the goods to be returned. Contact us for advice.

Can bailiffs take goods belonging to someone else?

The bailiff can only take goods belonging to the person (or people) who owe the rent. They should not take goods that belong to other people, including rented or leased goods. If they threaten to do this, explain that the goods do not belong to you. Show a receipt or credit agreement as proof.  If the owner hasn’t got a receipt, they can provide a sworn statement called a ‘statutory declaration’ instead. Contact us for advice.

Extra advice:

court costs

If the third party loses a claim in court to get their goods back, they may have to pay a large amount of court costs.

If a bailiff takes goods belonging to a third party, the third party can apply to court to get the goods back. They can do this by filling in a court form N244 and paying a fee. They will also need to pay the court a deposit. The size of the deposit depends on the value of the goods that have been taken. Any sale of goods is suspended during this process. Contact us for advice.

Bailiffs can take goods that are jointly owned by you and your domestic or business partner. If you are the only person who owes the rent, they are only entitled to your share of the goods.

Can bailiffs take goods on hire purchase or conditional sale?

There are different legal views about whether bailiffs can take control of goods on hire-purchase or conditional-sale agreements. If a bailiff threatens this, contact us for advice.

What if there are no goods to take?

If the bailiffs come into your premises, they may decide that your goods are not worth enough to cover the cost of them coming with a van to remove and sell them. If this is the case, the bailiff may return at a later date to try to take control of your goods. They have 12 months from the date of the enforcement notice to take control of your goods. If instalments are agreed with a bailiff after they have sent you an enforcement notice, the 12 month period can start from the date that any payment arrangement is broken.

Sub-tenants

Under the rules on CRAR, the landlord can serve notice on a sub-tenant telling them to pay rent directly to the landlord until your arrears are cleared. If the sub-tenant fails to pay the rent claimed under the notice, then the landlord can use CRAR against them.

Forfeiture

If you are in arrears with your rent, your landlord could take steps to repossess the property. This allows them to end the lease early without going to court. Your landlord may be able to take forfeiture action in other circumstances, including if you:

  • become bankrupt or go into liquidation;
  • fail to insure part of your premises; or
  • fail to maintain part of the premises properly.

Extra advice:

can my landlord use forfeiture?

Check the terms and conditions of your lease to see whether your landlord can take forfeiture action. Identify under what circumstances they can do this. Find out whether there are steps you can take to put things right.

Breaking a term or condition of the lease is known as a ‘breach’ of the lease. Some breaches are remediable. This means that you can take steps to put the situation right.

For most breaches of your lease, forfeiture action can only be taken if your landlord serves you with a written notice under section 146 of the Law of Property Act 1925. For non-payment of rent, this notice is not required. This area of law is complicated. For information on how to find out more about it and how it applies to you, contact us for advice.

The landlord may forfeit the lease by:

  • taking physical possession of the premises by peaceful re-entry, for example, by changing the locks when no-one is at the premises; or
  • taking court action to repossess the premises.

You may be able to apply to the court for ‘relief from forfeiture’. This would enable you to stay in the property as long as you meet certain terms and conditions. You would usually need legal advice from a solicitor to help you apply for relief from forfeiture. They will usually charge you for their services. Contact us for advice about how to search for a solicitor who may be able to help you.

If your landlord will not bring the lease to an early end, and if you are unable to do this, then you may be liable to pay the rent on the premises until the full length of the lease runs out. This would be the case even if you stopped trading and closed your business down. In this situation, your landlord can still take further action to recover what you owe.

See our fact sheet:

Business rates.

You may also be liable for the business rates on the premises.

After you have stopped trading, you can treat any rent you still owe as a ‘non-priority’ debt. However, business rates will still be a ‘priority’ debt.

Can my landlord use commercial rent arrears recovery and forfeiture?

Some landlords change the locks on business premises, which ends the lease, and then refuse you access to the property to remove your goods. This is illegal because once the lease is forfeited, the lease ends and the landlord can no longer use commercial rent arrears recovery. This applies even for rent arrears from before forfeiture action was taken. Therefore, the landlord must allow you access to the premises to remove goods and equipment.

Some landlords take a detailed list of all items on the premises that do not belong to them. They may then write to you to tell you that the goods will be held for a certain period of time so that you can make arrangements with the landlord to collect them. The landlord may also tell you what will happen if you do not take the goods away.

If your landlord refuses you access to the property, you may have to take court action against them.

  • If the goods that have been taken control of are still on the premises, you could apply for a court order which prevents the landlord removing the goods for a certain length of time.
  • If your goods have already been removed, you may need to ask the court to order your landlord to return them. Alternatively, you could make a court claim for the value of the goods concerned.

You are likely to need legal advice from a solicitor to help you. They will usually charge you for their services. Contact us for advice about how to search for a solicitor who may be able to help you.

Court action to recover commercial rent arrears

The landlord could make a claim through the County Court to recover your rent arrears, without repossessing the property. They can also do this if your business premises have previously been repossessed but you still owe rent arrears.  The order that the court makes is called a county court judgment (CCJ). A CCJ will be recorded on your credit reference file for six years and can affect your ability to get further credit.

  • If county court action is taken against you, you will get a ‘claim form’. This gives details about the debt and tells you how much is being claimed.
  • You can complete the ‘admission’ form if you admit the debt and want to make an offer to pay the debt in instalments.
  • If you want to dispute all or part of the debt, contact us for advice.

Information:

charging orders

Even if you keep to the payments ordered by the court, your landlord could apply to secure the debt against any property you own. This is known as a ‘charging order’.

The County Court should consider your circumstances, and your income and outgoings, before making a decision about how the debt should be paid back. The final decision about how much you should pay back each month is taken by the court, even if the landlord wants a higher amount.

If you keep to the payments ordered by the court, your landlord cannot take most types of further action against you.

If you miss payments on a CCJ, the landlord can take further action against you through the County Court, which could include:

  • taking regular deductions from your wages, if you are employed (called an ‘attachment of earnings order’);
  • freezing money in your bank account (called a ‘third party debt order’); and
  • using bailiffs to try to take control of your goods.

County court bailiffs can break into your business premises even if they have not been in before.

High Court

See our fact sheet:

Debts in the High Court.

Debts to landlords are not usually regulated by the Consumer Credit Act 1974.  Bailiffs called High Court Enforcement Officers (HCEOs) could be used to recover the debt if you:

  • have a CCJ for a business debt that is not regulated by the Consumer Credit Act 1974; and
  • you do not keep to the payments the court has ordered on the CCJ.

If HCEOs have not been into your home before, do not let them in. This is because they should not force their way into your home unless they have been in peacefully before and taken control of your goods properly. If a bailiff threatens to come in by force under the new law, even when they have not been in before, contact us for advice.

HCEOs can break into your business premises, even if they have not been in before.

Bankruptcy

If you are an individual and you owe £5,000 or more to your landlord, they could petition for your bankruptcy.  Bankruptcy is an official order which means that any assets or property that you own could be sold to raise money to pay your debts. Your landlord would first have to send you a ‘statutory demand’. This is a demand for money drawn up in a set format.

Information:

limited companies

If you run a limited company, the term ‘winding up’ is used to describe the process of one of your creditors, such as the landlord, making your business bankrupt. There are different rules about this process. Contact us for advice.

See our fact sheet:

Bankruptcy.