Overview of retail lease agreements in United Kingdom

In England and Wales leases are regulated by English common law and in particular by the Landlord and Tenant Act 1954. 
In Scotland, leases are based on the common law.

There is some protection for retail tenants under the Tenancy of Shops (Scotland) Act 1948. The law of Northern Ireland is closely related to the law of England and Wales.

There is no minimum or maximum duration in England and Wales. The parties are therefore free to determine the term of the lease at their own discretion.

Retail leases in England, Scotland and Wales vary from periods of 3 to 25 years (but most commonly are between 3-10 years). 
In England the tenant has a right to renew under the law, unless the landlord can prove statutory grounds or unless the renewal right has been excluded by agreement before the lease agreement starts. 

In Scotland leases cannot be longer than 175 years, and there is no right to renew.

The landlord is entitled to terminate the lease agreement early if this is specifically permitted by the lease (known as forfeiture in England and Wales and irritancy in Scotland), and this will usually be exercisable in the event of the following:

• the tenant has not paid the rent due under the lease agreement;
• the tenant is in breach of its covenants;
• the tenant is insolvent. 

In Scotland, in addition, if rent is not paid for two years, the landlord can also terminate by operation of law.

In England, in addition to the above, the parties may agree that the landlord has the benefit of a break right but this would be subject to proof of statutory grounds (such as redevelopment) unless the lease is contracted out of security of tenure.

The tenant is entitled to terminate the lease agreement early if this is specifically permitted by the lease.

There may be certain pre-conditions to be agreed between the parties, such as payment of rent up to the break date and giving the property back free of sub-tenants.

In England and Wales the application of a right of renewal will depend upon whether the lease is contracted within or outside the security of tenure provisions of the Landlord and Tenant Act 1954. If the lease is within the 1954 Act, there is a right to renew upon expiry, unless the landlord is able to prove one of certain grounds under the Act as to why the renewal should not take place. If the lease is contracted out of the 1954 Act, the lease will come to an end unless a renewal is negotiated. In any event, there is no eviction indemnity payable.

In Scotland there are no automatic rights of renewal although retail tenants may make applications to the court in limited circumstances.

Any lease for more than five years will usually be subject to five-yearly reviews of the rent. Historically the rent is reviewed to market rent and is reviewed upwards only, taking into account various assumptions and disregards.

It is also becoming increasingly more common to see annual or 5 yearly rent reviews increased by reference to the retail prices index, or the consumer prices index (published by the ONS),sometimes with agreed yearly maximum and minimum revenue.

There are no mandatory provisions regarding fitting-out works. The matter is largely left to the parties’ discretion.

Fitting out works will usually be documented by a licence or consent for alterations. In most cases, the tenant will be permitted to carry out internal non-structural works and install signage and shop fronts but not any structural works. Often the landlord’s consent is required, which must not be unreasonably withheld. The tenant is usually required to reinstate the premises to their original condition at the end of the lease.

Usually the tenant has to reinstate the premises to their condition prior to the tenant occupying the premises. This includes removing any alterations and fitting out works which the tenant may have carried out. In England, the landlord can be required to pay compensation for improvements, although this is unusual and the landlord will prefer reinstatement. If the tenant does not reinstate then the tenant must compensate the landlord for the cost, but this compensation is capped by reference to the loss in value of the premises.

Subleasing and transferring the lease are matters generally for agreement between the parties and require the landlord’s consent. The lease agreement usually provides certain conditions that the landlord can impose if it is acting reasonably. New consent cannot be unreasonably withheld, by law, in England and Wales, where it is also normal practice for the landlord to require (at least if it is reasonable and often in any event) that the tenant guarantees the assignee or other security.

In the case of the landlord selling its interest, any new owner will be bound by the terms of the lease. The outgoing owner may continue to have ongoing liability for breach of the covenants in certain circumstances.

In Scotland, for leases of more than 20 years to bind new owners, they must be registered with the Land Register of Scotland.

The tenant has no pre-emption right in the case of the sale of the premises unless otherwise agreed in the lease.

There are no mandatory rules regarding the form and/or duration of a rental guarantee.

Parent Company guarantees are common, followed by security deposits of between 3 and 12 months rent and service charge, plus value added tax. Bank guarantees are used only occasionally.

There are no mandatory rules for maintenance and repair obligations. This matter is therefore subject to negotiations between the parties. In Scotland, in the absence of contractual agreement, there are basic common law rules which would apply.

However, if the premises are in a multi-let shopping centre, for example, it is likely that the landlord will repair the structure and the tenant will repair the internal areas. The tenant will pay for the repair of the structure via a service charge. If the unit is a stand-alone unit, then it is likely that the tenant will be responsible for repairing the whole unit directly. The parties may decide to agree, for older buildings in particular, a cap on the service charge.

There is no VAT on rent and service charges the landlord has not elected to waive its exemption for VAT purposes. This will depend on the identity of the premises. However, it is very usual for a landlord not to have done so.

VAT at a current rate of 20% will usually be chargeable on rent and service charges if the landlord has waived its exemption for VAT.

As indicated above, the matter of retail lease agreements largely depends on the arrangements agreed between the parties. Other main clauses are as follows:

• Insurance: either the landlord or the tenant will have to insure the premises depending on the specific circumstances and identity of the premises. The tenant will reimburse the landlord if it is the landlord who insures. The landlord will be obliged to reinstate if there is damage or destruction by an insured risk if the landlord insures. It is also becoming more common to document the position should damage by an uninsured risk arise. If the lease is silent then the tenant bears the risk but generally it is more common these days to see provisions which place the risk back with the landlord who can choose either to reinstate (at its own cost) or terminate.