This is the third in a series of posts discussing the key points to be considered when negotiating heads of terms. In line with the other two (part one and two), whilst our discussion is tailored to dark stores, the points raised will be equally applicable across other asset classes.
- The Property - Clearly one of the most important things to identify in the lease is the extent of the property itself. The property should be defined by reference to a plan as this is the clearest way of depicting parties' intentions. That plan should be accompanied by a written description and, if the property is part of a building, the parties will need to work out what part(s) should be included. For example, are windows and external doors going to be demised to the tenant or should they remain with the landlord? What about any shopfront?
The parties' repairing obligations are closely linked to what is or is not demised as part of the "property". Typically if a tenant is taking a lease of a whole building it will be responsible for the entirety of that building, structure included, and it will need to deal with repairs accordingly. If a tenant is instead taking a lease of part of a building it will typically be granted an internal demise and be liable for the repair and maintenance of the parts of the property demised to it. In these circumstances the landlord will retain responsibility for the remainder of the building (ie: the structure), with recovery of the costs of repair sought via the service charge.
In the context of dark stores, we would expect the majority of leases to be of standalone warehouse units with the tenant taking a demise of the whole of that unit. In this context, the tenant should be conscious of the state of the unit at the start of the term. If the property is in a poor state of repair the tenant would be well advised to insist on a schedule of condition so that its repair obligations can be limited to the condition set out therein.
- Permitted Use - This is the use, as set out in the lease, for which a tenant is allowed to use the property. At a base level a tenant must ensure that the permitted use covers the use it needs for its intended occupancy.
Beyond that a tenant should consider: (i) whether it might want to be able to change use without needing landlord consent; (ii) how the breadth (or lack thereof) of the use will impact any rent review (a narrow use clause will typically mean a lower reviewed rent, whilst a more flexible one will typically result in a higher rent); (iii) ensuring the use covers ancillary uses such as storage, staff kitchens, staff offices, etc; and (iv) whether it wants flexibility of use to enable it to market the lease more easily if it needs to assign (ie: by being able to say to potential assignees who are operating a different business type that they can implement their use without landlord consent).
Conversely a landlord should consider: (i) how much control it wants to have over use; (ii) whether there are any uses (ie: betting shops, massage parlours) which it wants to expressly prohibit; and (iii) (as with a tenant) how the use will impact any rent review.
There are then multiple circumstantial factors to consider on both sides. In the context of a dark store within a residential area, for example, the landlord may also want to include controls on the tenant's hours of use so as to minimise disturbance to neighbouring properties.
- Planning (in the context of use) - The key question here is whether the current planning use for the property enables it to be used for what the tenant intends. If not, the parties will need to agree whose responsibility it will be to obtain planning permission and how the risk of that not being granted will be dealt with.
There are two typical ways to do this, the first is for the lease to be granted with responsibility resting on the tenant to ensure statutory compliance and therefore ensure a correct planning use exists. The second is for the parties to enter an agreement for lease conditional on planning, with one party taking responsibility for obtaining the required planning consent. If the required planning consent is not then granted within a set period, the agreement for lease should allow both parties to walk away from the deal.
- Rights Granted to Tenant - It is important that any tenant of a new lease ensures that it has all the necessary ancillary rights to be able to operate from the property.
Will the tenant require access to other parts of the building? Will it need the use of existing conduits and pipework? Will it need to use a loading bay or car parking spaces? Are there goods lifts it will need to use? Will the tenant need to install extraction and refrigerant cooling apparatus outside its demise? These are all practical considerations that a tenant will need to agree with the landlord at the outset. Whilst landlords generally want to be accommodating of tenants' needs, they will themselves need to be conscious of the limits of their own rights and the impact any new tenant might have on other occupants in the building or nearby.
In the context of dark stores, the question of loading bays, parking and goods movements to and from the same will be particularly important.
- Rights Reserved to Landlord - In a similar vein to tenant's rights above, landlords will want to ensure that they have the rights they need to comply with their own lease obligations (including those in existing leases to other tenants in the building). Landlords will also want the right to inspect the tenant's compliance with its lease obligations, to retain the right to redevelop nearby property and, if necessary, to erect scaffolding at or near the property.
Tenants are generally realistic about the necessity of allowing the landlord certain standard reservations but should try to ensure they are caveated as appropriate to prevent the exercise of such rights having a material impact on the tenant's use and enjoyment of the property.
In our next post, we will discuss fitting out, alterations and repairs.