Understanding Leases #1

15 August 2013 •  Market Information

Although with the advent of plain English drafting, commercial leases are arguably easier to understand now than once they were, they still manage to give rise to much confusion. I can still remember from my childhood the title of a pop song sung by an American called Johnny Tillotson. The song presumably about an object of his affection was called “Poetry in Motion”. My young ears heard instead “Oh a tree in motion” and so the meaning of the song, if there was any, was lost to me and for some time afterwards I felt vaguely uneasy in the presence of any plant larger than a bush. The legal language and jargon oftenemployed, even now, by lawyers when drafting commercial leases can also lead to confusion and misunderstanding. I am frequently reminded of this confusion by the questions that even experienced business people ask of me when I am reviewing lease documents and agreements to lease. With this in mind I thought it might be useful to explain or demystify a selection of these terms for those readers who, although experienced with the business end of leasing may be at times nonplussed with some of the terms used. I have therefore chosen a selection of some of the usual culprits and to each of them I have added a brief explanation.

Lessor: The landlord

Lessee: The tenant

Term: The duration of the time the lease is in force

Renewal of Lease: Where the lease is extended pursuant to a contractual right normally given to the tenant in the lease document. Usually the existing terms of the lease are carried on and only the duration of the lease is altered. This is to be

contrasted with a new lease where the parties are free to negotiate any new terms that they can agree upon but where the existing lease and all its terms comes to an end.

Rental Review: Pre-agreed dates during the term of the lease at which either the landlord alone or, in some cases either the landlord or the tenant may require that the rental be reassessed. This is usually based on a market rental but is sometimes fixed to a formula such as CPI or a fixed percentage increase.

Rental reviews are not to be confused with lease renewals. Frequently both occur at the same time but that is not always the case.

Ratcheted Rental: Where the rental on a rental review may not be reduced below a certain point.

This may be a predetermined amount, it may be the initial rental payable at the start of the lease or it may be rental payable immediately preceding the review. The distinction is significant

Chattels: Chattels are personal property that can be completely transferred by delivery i.e. portable things, as contrasted with fixtures, which are things that are affixed to real property i.e. land and buildings, by permanent means. Chattels may be owned either by the landlord or the tenant. By law and according to their nature, fixtures belong to the landlord whether they are installed by the tenant or the landlord – although this presumption may be displaced by express agreement.

Tenant’s Improvements: These are improvements carried out or paid for by the tenant, normally to the land and buildings or perhaps to the landlord’s chattels. Surprisingly these are included in the value of the property upon rent review unless there is an express direction in the lease that they are to be disregarded.

Tenant’s Fixtures: Tenant’s improvements that are structural and are carried out by the tenant to the landlord’s property. They almost always require the consent of the landlord. Because fixtures are fixed to the landlord’s buildings they become part of the landlord’s property unless the lease provides otherwise. Some leases provide that the tenant may remove their fixtures at the end of the lease. Some leases make the removal of tenant’s fixtures compulsory. In either case it is usual for the lease to provide that the tenant must make good the damage caused by such removal. Alternatively the landlord may elect for the fixtures to remain there as part of the landlord’s property without any payment to the tenant.

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