Commercial property is real estate that’s used for various kinds of business activities. While it usually refers to buildings that house businesses, it can also refer to land used to generate a profit, as well as large residential rental properties too. Designating between residential and commercial property is important from a legal standpoint, since how it’s classed has implications for how it’s financed, taxed, and how different laws are applied to it. Commercial property law involves the purchase, sale, lease, and use of these kinds of buildings and land, while conveyancing is the process of transferring this property from one legal owner to another. Conveyancing involves an agreement on the sale, the exchange of contracts and completion; a key difference between commercial and residential conveyancing arises when there is the need for a commercial lease. This needs to be negotiated with the premises’ landlord’s solicitor, so the skills of an experienced commercial conveyancer are essential.
Some areas of commercial property law that commercial conveyancing solicitors regularly deal with include:
Tenant Insolvency
Insolvency is a state of financial distress where a business is unable to pay their debts. In terms of commercial property law, tenant insolvency is where a commercial tenant can no longer pay their rent. As a landlord there are a number of options for going about this.
- Do nothing- wait it out for a period of time and see if the issue resolves.
- Participate in a negotiation or mediation dispute resolution process
- Issue a claim in the courts
- Gain a payment from the guarantor or drawing from a rent deposit
- Forfeit the lease
- Bring insolvency proceedings such as serving a statutory demand and/or petition.
From March 2020, the UK Government implemented a variety of provisions, restrictions and allowances in response to Covid-19 and the pandemic’s economic fallout. On 1 October 2021, some of these temporary insolvency restrictions were phased out and statutory demands against companies and winding up petitions returned. However, a number of restrictions are still in place for commercial landlords, who have some enforcing restrictions to deal with. Specific debts related to the pandemic in circumstances where the relevant tenancy has in fact been adversely affected by the pandemic include rent, service charges or interest incurred from 21 March 2020 and ending with the last day that the tenant’s business or premises were in fact subject to a lockdown (if no earlier date then by default 18 July 2021). This could be because the tenant’s business or premises were subject to a lockdown between 21 March 2020 and 18 July 2021.
Consent for sublets
Subletting, or ‘Commercial Sublease’ is a contract which is used to rent commercial property from a tenant, as opposed to renting from a landlord or owner. In this case, the original tenant is known as the sublandlord and the new tenant is known as the subtenant. Although a new lease agreement is created between the sublandlord and the subtenant, the original lease, also known as the master lease, remains intact and the sublandlord is still responsible for reporting to the original landlord. Consequently, the terms outlined in a sublease cannot breach the terms outlined in the master lease. Most commercial leases forbid subletting, and that’s because as soon as more than two parties are involved, agreement becomes more difficult and conflict more likely. Furthermore, the head landlord, who of course owns the property, is less able to enforce their rights. However there are occasions when a sublease might be desirable. The most common use of a sublease is for letting an old building to many tenants. Likely, the property owner does not want to be involved and he is happy to take a modest rent for the whole building and allow his entrepreneurial tenant to sublet small parts at higher rents.
Rent reviews
A rent review allows the landlord to recalculate the rent payable for the property. These reviews take place on a certain date or dates which are outlined in the lease, as well as stating how the review is to be carried out. How rent review provisions are drafted is important, as reviews are often based on either the Retail Price Index (RPI) or the Open Market. The two types of rent reviews are as follows:
- RPI- this is a measure of inflation which changes from month to month, and depends on the current price of goods and services. Essentially, it’s a form of indexation. As RPI is based on inflation figures, this method can provide both the landlord and tenant with more certainty as it’s generally more consistent. RPI-based reviews are less contentious as they are based on a calculations, so both parties may be more agreeable to this kind of review.
- Open Market- this type of rent review reflects the value of the property on the Open Market at the date of the review. The review will compare the rent of others generally drafted to operate ‘upwards only.’ This means the reviewed rent will either increase in line with the Open Market or remain the same. This protects the landlord and allows them to retain the same level of rent.
Licences for change of use
If you want to change a property’s commercial use class, failure to obtain the necessary planning permissions could lead to significant financial penalties. In order to help businesses make the best use of commercial real estate, the Government has made the planning rules more flexible so that it is now possible to change between a range of commercial uses without the need for planning permission. If the current and proposed uses fall within the same use classes- for example, turning a Class A1 hairdressing salon into another A1 retail store then planning permission isn’t needed. However, changing a property’s commercial use class from A1 to A3 such as an establishment where customers can eat on-site then planning permission is needed.
As a business, it’s vital that the process of buying and selling commercial property is undertaken efficiently and legally if the business is to maximise its investment or minimise any losses. A specialist commercial property solicitor will use their expertise to help businesses with a wide range of legal matters. Looking for assistance with commercial property Sunderland or commercial property Newcastle? Give us a call today.