Commercial Leases 101

In this 101 guide you’ll learn about commercial leases.

Whether you’re a commercial landlord or a tenant, this guide should give you the information you need to be confident your commercial tenancy agreements are correct, fair and legally compliant.

It’s important to say from the outset that there is no standard form of lease.

The terms of every lease are negotiable, and its contents may reflect the economy at the time and the relative bargaining strength of the parties.

But there are certain things that a commercial lease needs to cover and this guide will help give you some insights into what you should and shouldn’t have.

What does it mean to be a commercial landlord?

Being a landlord is a business.

And, like all business activities, while much of what landlords and tenants may agree between them is the product of negotiation and market dynamics, law also plays a key part.

The law that governs landlord and tenant relationships is well established and, in a number of cases, it’s non-negotiable.

If you’re a landlord providing premises to someone intending to run their business from that spot, or you’re a business tenant about to agree terms with a landlord for those purposes, you should be aware of those laws.

Commercial leases are a significant commitment that can have a very material impact on a business and its prospects of success.

If either a landlord or tenant becomes unhappy with the terms they’ve agreed, wants to end them or wants to change them, what’s gone into the terms of that agreement may suddenly become critically important and potentially very contentious.

What is a commercial lease?

Let’s start by defining what a commercial lease is.

A commercial lease is an agreement between a landlord and a tenant that sets out the terms and conditions under which a tenant may occupy and use a commercial property.

Commercial properties include offices, shops, warehouses, factories and other industrial units.

The landlord owns the property and most commercial leases contain standard clauses which govern the relationship between the landlord and the tenant.

Generally, commercial lease terms are much longer than residential property leases and place more responsibilities on tenants.

The principal clauses relate to rent, rent reviews, obligations to maintain and repair, insurance, payment of outgoings, guarantees, the term of the lease, option to terminate and uses of the premises.

What are the types of leases available?

Commercial leases in Ireland generally are of two types: short term or long term.

Short Term Lease:

Short term leases are usually under 5 years in length and traditionally are offered for 4 years 6 months or 4 years 9 months.

Such leases are generally Internal Repairing and Insuring (IRI) type leases.

Short term leases are usually much shorter documents and much more straightforward and generally the landlord will still maintain possession of the business property.

Long term Lease:

A long-term lease is a commercial lease that is over 5 years in length.

These are a lot more complicated than short term leases and last for up to 10 years with rent reviews every 5 years.

The distinction between the two types of leases is important because different statutory rights apply.

A tenant who is in actual occupation of a business premises for over 5 years is entitled to a duration of 25 years with what is generally a Full Repairing Insuring (FRI) lease with five yearly rent reviews.

In these cases, the landlord maintains ownership but essentially gives up the possession of the property and the tenant becomes responsible for the maintenance and repairs.

At the end of the 25-year lease, the tenant has a right to a further lease of 25 years; therefore, theoretically the tenancy never ends because the lease can be renewed again and again.

The tenant can also have the right to assign or sublet their interest in the lease subject to the landlord’s consent.

This clause is what’s commonly known as an ‘alienation’ clause.

Consent cannot be unreasonably withheld.

Leases usually have a clause that restricts assignments or subletting of the lease to another party.

Subletting occurs when a tenant permits another party to lease all or part of the rental property that the tenant has leased from the landlord.

Assignment is where a tenant transfers their entire interest in a tenancy to a third party.

If premises are assigned or sublet without consent the landlord may not recognise the new tenant.

By granting a long-term lease the landlord is in effect “selling” the property whilst obtaining a rental income.

In contrast when a short-term lease is finished, the property is normally handed back to the Landlord.

The distinction between long term and short-term leases has been blurred somewhat by the right of a tenant to renounce their Landlord and Tenant rights.

More about this later.

What is a Full Repairing Insuring (FRI) Lease?

In a nutshell, an FRI is a lease where the costs of all repairs and insurance, both internal and external, are the responsibility of the tenant.

In practice, leases for more than five years are usually of this type.

This is on the basis that the tenant has a long-term interest in the property and that the landlord’s interest is an investment, namely the right to receive rent.

What is an Internal Repairing and Insuring (IRI) Lease?

In an IRR lease the tenant is responsible for only the internal repairs and decorations with the landlord being responsible for the external upkeep.

This would be usual in the case for short term leases or in multi tenancy situations where the tenant may pay a service charge for external maintenance.

What is a Renunciation?

As discussed earlier, a tenant who is in continuous occupation of a business premises for an uninterrupted period of five years may acquire a statutory entitlement to a new tenancy of 25 years without the landlord’s consent.

That is why many landlords seek to let property on short term leases of between 12 months and 4 years and 9 months, to avoid that 5-year period.

A claim to a statutory tenancy may have a significant effect on a commercial landlord who has alternative plans for the long-term use of the property.

So, for landlords it is important that they can take steps to prevent a statutory tenancy claim from arising.

This is normally done through a Deed of Renunciation (a “Renunciation”).

This is a legal acknowledgement by the tenant that even if they remain in occupation for 5 years or more, they will not automatically be entitled to a new long lease on expiry of the lease term.

A Renunciation can be entered into at the commencement of the tenancy or anytime thereafter.

It is preferable, from a landlord’s perspective, if it is executed at the outset as there is no guarantee that the tenant will agree to execute the Renunciation once the lease has been entered.

The landlord should ensure that the Renunciation is in writing, and that the tenant receives independent legal advice on the implications of the Renunciation before signing it.

In situations where a tenant is not willing to execute a Renunciation, a short-term lease should be entered.

What provisions are typically included in Leases?

• name and address of the Landlord and Tenant;
• the Term (i.e. duration) of the Lease;
• annual rent (and any other payments such as insurance payments to be reimbursed to the landlord and service charge) payable by the tenant during the term and a rent review mechanism (Value-added tax may be payable on rental income).
• description of the Premises demised to the Tenant by reference to a map;
• permitted use;
• repairing obligations;
• alterations;
• alienation;
• rent reviews; and
• There are no statutory insurance requirements. However, a lease will generally provide that the landlord insures the property and recovers the cost from the tenant.

What is the Landlord generally responsible for?

The landlord is responsible for:

• ensuring that the Tenant is given ‘quiet enjoyment’ of the premises (i.e.  not to interfere with the Tenant’s use and enjoyment of the premises);
• insuring the premises; and
• in multi-unit Buildings and Developments, repairing and maintaining the external and structural parts of the premises.

In the event of the landlord being in breach of its obligations, a tenant may:

• apply to court for a specific performance order; or
• seek damages for loss suffered.

What is the Tenant responsible for?

The tenant is generally responsible, among other things, for paying the rent and maintaining and repairing the internal non-structural parts of the property.

In relation to “repair” obligations in general great care should be taken to ensure that the tenant is not obliged to place the property in a greater state of repair than currently exists.

In the event of the tenant being in breach of its obligations, a landlord may:

• forfeit the Lease;
• apply to court for a specific performance order;
• seek damages for loss suffered; and
• seek an order for possession of the property.

The terms of a lease will generally describe the basis on which the landlord may evict the tenant.

Ultimately, a landlord may have to apply to court to obtain an order for possession.

What about the Rent?

Rent is a key commercial term in any lease.

Generally, the landlord will expect that rent is paid in addition to contributions for service charges, rates and insurance.

Rent will usually be paid quarterly in advance, although it is possible to make any commercial arrangement as may be desired.

Generally, the lease will allow for interest due on late payments.

It is usual and desirable that the tenant is obliged to pay any VAT that arises on the rent.

Under the general rules of VAT, the landlord will have to account for VAT out of the rent, unless the lease specifies that the tenant has to pay VAT on the rent.

What are Rent Reviews?

One of the most important parts of a commercial lease is the rent review provisions.

All rent reviews under leases created since 28th of February 2010 must be open market reviews either upwards or downwards depending on the state of the market.

Long-term commercial leases should contain a rent review provision which sets out when each rent review will take place, the method of review, how the property will be valued for the purpose of the rent review, the procedure to be followed, and how disputes should be dealt with.

There are several different methods of calculating a rent review, which include:

• Indexed-linked: The rent review is linked with an index such as the retail price index.
• Revaluation in the open market: The rent is calculated based on the current market rate at the date of the rent review. This is the most common form of rent review.
• Turnover or profit rents: The amount of the rent review is linked to the tenant’s turnover of profit.
• Premium rents: The tenant pays a premium on the current market rent so that the landlord agrees to conduct fewer rent reviews during the term of the lease (or no rent reviews at all if the premium is sufficient).
• Fixed increases: The increase to the rent for each review is fixed at the commencement of the lease.
• Sub-lease rents: The rent increase is linked to the rental income generated by sub-letting the premises.

It is important to examine the terms of the lease to ensure that rent review procedures are carried out in time and are properly conducted.

Are personal guarantees required?

Guarantors are very commonly required by landlords in leases.

This is because the original or incoming tenant may not have the financial strength by itself to perform the obligations in the lease.

Frequently, a group company takes a lease but a “head” company, with more financial strength and depth will guarantee the performance of the tenant’s lease obligations.

In the case of smaller companies, it would be common that the directors or principal shareholders are required to guarantee the performance of the tenant’s lease obligations.

A tenant should always look to restrict the terms of a guarantee.

A landlord may agree that the guarantee will last for only the first few years of the term.

Alternatively, a deposit may be accepted by the landlord instead of a guarantee.

Another form of limitation is to agree a rolling guarantee for the term of the lease but with exposure at any one time to one year’s rent and outgoings.

If a landlord will only accept a personal guarantee, then there may be scope for negotiating a limit on the guarantee.

Who is responsible for Insurance?

The tenant is usually responsible for the cost of insurance to cover:

• Normal perils such as damage by flood and fire etc;
• Tenants’ public liability and employers risks;
• Damage to plate glass windows;
• Loss of rent for three years.

The tenant will be obliged to take out their own policy to cover the tenant’s risks and will reimburse to the landlord the cost of the landlord’s policy covering their risks.

It is therefore important for the tenant to ascertain the cost of insurance before taking on the lease and if possible, to get all the risks insured with the one company to avoid duplication or overlapping of the policies and to make the job of processing a claim easier if there is a problem.

What are break options to terminate?

The term or duration of a lease is a matter for negotiation between the landlord and tenant and their agent.

Because of the ease at which landlord and tenant rights can now be waived by the tenant (that is the right of the tenant to remain in possession after a period of five years occupancy has elapsed), the term or duration of the lease is commercially significant.

The term will be relevant to both the landlord and the tenant, in that the tenant will be obliged to quit the premises unless he negotiates a longer term.

Break options are a matter of agreement.

They can allow for either the landlord or tenant to terminate the lease on particular dates.

They usually kick in after an agreed period of time has elapsed such a one year, three years etc.

Some are expressed to be personal and can only be exercised by the original tenant.

Some will be free options, or some may require a payment of a sum of money to the landlord representing for example three months or six months’ rent.

Generally, they can only be exercised if the tenant is compliant with its obligations under the lease and the rent is paid up to date.

A variation on a break is an option to renew.

They are not often found in leases because there may already be a statutory right of renewal.

A tenant starting up a new business should seek to agree a short term of say three years along with an option to extend the term if the business is successful.

When can a lease be terminated?

Leases may terminate for a variety of reasons.

A lease may terminate because the term of the lease has expired.

It may terminate early for non-payment of rent or for breach of an obligation by the tenant.

The process for termination of a lease by a landlord for a breach by the tenant is called forfeiture.

Generally, leases will specify that the lease will terminate if rent is in arrears for a certain period, usually 7 to 21 days.

Where there has been any other type of breach of the tenant’s obligations under the lease (non-financial), it is necessary for the landlord to serve a notice on the tenant specifying the breach and giving the tenant an opportunity to rectify it.

In the case of non-payment of rent, this notice is not required.

In some cases, the rent must be demanded first.

When a lease terminates for non-payment or after failure to perform the obligations following a notice of the breach, the landlord can enter the premises and terminate the lease.

This is only permissible if it can be done peacefully.

Peaceful repossession means that the premises aren’t broken into nor is the tenant overpowered by force of numbers.

Where the landlord cannot peaceably re-enter the property a Court Order will be necessary.

Do Commercial leases have to be registered?

All commercial properties need to be registered with the Property Services Regulatory Authority (PRSA).

The legal obligation to register the property is on the tenant.

This means that once the commercial lease is finalised and signed, the tenant needs to provide the PRSA with the following information:

• The address of the property
• The date of the commercial lease
• The tenancy term of the lease
• How much the rent is

It is now a legal requirement and must be done within 30 days of receipt of a stamp certificate from the Revenue Commissioners.

What is a stamp certificate?

If you take out a commercial lease, you will need to pay Stamp Duty on the property.

You will need to pay the Stamp Duty even if it is a short-term lease.

It is on the tenant to make sure that this Stamp Duty is paid.

The amount that you need to pay in Stamp Duty will depend on the length of the commercial lease and the average annual rent paid.

Here are the current Stamp Duty rates: