ILN: BUYING AND SELLING REAL ESTATE - AN INTERNATIONAL GUIDE

BUYING AND SELLING REAL ESTATE IN ENGLAND AND WALES 108

predetermined intervals (typically five years). The rent under a building or ground lease, however, is usually nominal, reflecting the fact that a capital premium has been paid on the grant of the lease. The occupying tenant of business premises normally has a statutory right to renew the lease on the expiry of the contractual term. This right can be excluded by agreement between the landlord and tenant by following a prescribed procedure. Most underleases and short-term leases (e.g., five years or less) will exclude the right to renew. Depending on the state of the market and the particular real estate, the tenant of an occupational lease should seek to negotiate:

• where the real estate is bought as an investment, details of the occupiers of the real estate and the passing rents. 6. Leasing of commercial premises Leases of commercial real estate generally fall into one of two categories: • a building or “ground” lease at a premium for a long period, usually at least 125 years, possibly acquired as a capital investment to be sublet to occupational subtenants; or • an occupational lease for a shorter term (say, up to 25 years but often these days much shorter) at an open market rent. Long-term leases of commercial real estate are not uncommon, especially where there are plant and machinery tax benefits (capital allowances) that the freeholder wishes to retain or where the freeholder will not willingly part with the freehold (e.g. the Grosvenor Estate). Residential apartments are also owned by means of a long lease. The liabilities of a tenant will depend on what is agreed between landlord and tenant and are subject to negotiation. Generally, however, an occupational tenant would expect to be responsible for the costs of repairs, insurance, business rates (local taxes) and outgoings. There may also be an obligation to contribute by way of service charge for services provided by the landlord. The lease is also likely to prevent the tenant from making substantial alterations. The lease may also prevent the tenant from subletting or disposing of the lease to a new tenant without the landlord’s prior written consent. The rent under an occupational lease generally reflects the open market letting value of the premises and, depending on the length of lease term, there may be rent reviews at

an initial rent-free period;

• an unconditional right to terminate the lease early (a “break right”); and a limit on service charge payments. The first draft of a lease will normally be prepared by the landlord’s solicitor and the terms will be negotiated by the tenant's solicitor who will make similar searches and enquiries to those on a freehold purchase. A landlord will frequently require security if the tenant is an overseas company or a private limited company. This may take the form of a parent company guara ntee or a “rent deposit”. A rent deposit is a sum of money equal to (say) six to 12 months’ rent, held by the landlord, to be used by the landlord in the event of a default by the tenant; it will be returned at the end of the lease or in other agreed circumstances. • A well-advised tenant will also want to commission a survey of the premises, especially where the lease requires the tenant to repair and maintain the structure.

ILN Real Estate Group – Buying and Selling Real Estate Series

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