Hello and welcome to the start of Attwells ‘How to Read Your Lease’ Series which aims to provide an overview ‘top to bottom’ of every clause in a standard commercial lease.
Clause 1: Interpretation
The ‘Interpretation’ Clause is the first clause in every lease and you should think of it as your sign-posting system to help you navigate the lease. It sets out the majority of the definitions, key dates, and general important information – for example:
- ‘Property’ – What is the property? Is it the whole of a building or part of it? If it is part then what do you use in common with others? How can it be identified, can you refer to a Plan?
- ‘Contractual Term’ – How long is the lease? When does it start?
- ‘Annual Rent’ – How much is it? When do you start paying rent? Is there a Review Date?
‘Insured Risks’ – What are you insured against? Do you contribute to the Insurance by paying Insurance Rent?
Listed above are a few main definitions but this clause has much more to offer and it is important that you understand what each of the definitions means in relation to the lease. Look out for anything starting with a Capital Letter – this means that it is defined in Clause 1.
Also, remember that Clause 1 isn’t just definitions it also helps you interpret the meaning of certain key phrases, such as ‘a fair proportion’; the standard wording will explain that this is a fair proportion (share of) the whole amount payable or, that a reference to ‘Property’ is the whole or any part of it. Use this as your first reference point.
Clause 2: Grant
This clause is a brief overview of what is being granted to the Tenant and what the Landlord expects in return. The Landlord is granting certain rights and the exclusive use of the property and in return, the Tenant usually pays any annual and insurance rent under the lease along with interest (if applicable) and other sums due, such as service charges.
What is granting with full/ limited title guarantee?: If a lease is granted with ‘full’ title guarantee the Landlord is confirming that it can dispose of the property freely with full knowledge of it and that it does not reasonably know of any third party rights over of it.
If the title guarantee is ‘limited’ the Landlord is confirming that it knows of no issues relating to the property, but it cannot account for its predecessors. The Landlord is effectively stating that here are gaps in its knowledge concerning the property. Your solicitor can give you more information on the implications of this.
Clause 3: Ancillary Rights
An ancillary right is a subsidiary or incidental right that aids the Tenant’s ability to enjoy their property.
On the grant of a lease, Section 62(1) of the Law of Property Act 1925 automatically conveys any rights, fixtures, hedges, watercourses, privileges, easements (for example, rights of way), and other things that allow a Tenant to use and enjoy the property without the need for them to be expressly referred to in the lease. These are deemed to be ‘implied’ simply because they are existing rights (existing at the time the lease is granted).
Why is this important? Whether you want rights implied in the lease will depend on whether you are the Landlord or the Tenant. Your solicitor can guide you on what is best for you. But by and large, it is everyone’s interest that all rights required for the enjoyment of the property are properly negotiated and expressly set out in the lease.
Clause 4: Rights Excepted and Reserved
The aim of this clause is to exclude or reserve rights over the property so that the Landlord (or people authorised by the Landlord) can continue to use and enjoy any adjoining property to the fullest. From the Tenant’s point of view, this clause is useful as it adds to their knowledge of the physical demise of the property and sets out at the start of the transaction what may restrict their use and enjoyment.
This clause is especially important for instance if the Landlord wishes to build or to develop their neighbouring property in the future, the Landlord will reserve this right. However, you should note that as this may cause disruption to the Tenant they may seek to protect themselves by limiting the right so as not to affect their use of the property.
Other common reservations include rights of entry to the property for maintenance purposes; rights of light and air so that the Tenant can’t restrict the Landlord’s access to these things by building works for example; rights of support and protection if the Landlord’s property is attached to the Tenant’s leased property in any way.
The clause is also used more generally to ensure that the Tenant adheres to their obligations set out under the lease. It is of key importance to the lease.
How to Read Your Lease – What can you do?
If you are unsure of your legal obligation, we would recommend you contact a solicitor. Attwells Solicitors are property law experts, our commercial real estate team can offer you advice on various commercial law matters, including Commercial Leases, Investments, and Estate Management.
Pricing and fix fee rates can be found on our Commercial Property page along with additional information.