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The costs of commercial leases: is it up for negotiation?

The costs of commercial leases: is it up for negotiation?

The Tenant Fees Bill has shaken up the residential property market but the position is different in the world of commercial property. So, who should pay the costs incurred in granting a lease? Residential tenants were liable for many fees until very recently and the answer used to also be the commercial tenant but customs have already changed here…

It certainly has been customary in the past for a commercial tenant to be responsible for the landlord's legal and other costs on the grant of a lease in the past but, as with many customs, time has moved on and that is no longer the case. There are certain Landlord's costs that a tenant is expected to pay, such as:

  • costs incurred in the enforcement of tenant covenant
  • the cost of serving notices under the Law of Property Act 1925 in relation to forfeiture or the breach of a covenant
  • the cost of serving notice on a former tenant in respect of their obligations under an authorised guarantee agreement
  • costs in preparing and serving a schedule of dilapidations
  • the costs to the landlord of any applications made by the tenant for consent (e.g. assignment, sharing occupation, change of use or alterations)

The days when tenants paid costs

It would come as a surprise to a modern commercial landlord but it was the norm for a tenant to be responsible for the landlord's costs. This often extended to costs, fees and other liabilities such as disbursements and stamp duty. Until 1958...

The Act that relieved tenants of paying all costs

In 1958, Parliament enacted the Costs of Leases Act 1958 and relieved the tenant of this custom, or, as Stamp J put it in Lewis & Peat Ltd v Regis Property Co Ltd [1970], "destroyed that custom".

It has since been law, and of course long been the practice, that if a tenant is to be responsible for the landlord's costs, or vice versa, that agreement has to be made expressly in writing. This continued the general evolution of landlord and tenant law, arguably in the tenant's favour, and was further clarified in Cairnplace Ltd v CBL (Property Investment) Co Ltd [1984] in which the Court of Appeal had to overturn a High Court decision to permit, on a renewal under the Landlord and Tenant Act 1954, the retention of a clause obliging the tenant to pay the landlord's renewal costs.

Who pays now?

Though it is now routine that a landlord and tenant are to pay their own costs as regards to the grant of a new lease or on any renewal, the option remains open for each party to come to a contrary agreement provided they do so in writing, such as including it in an agreement for lease or the lease itself, as appropriate.

As we often repeat to our clients, it is always useful to instruct a solicitor on an early retainer and before heads of terms between the parties are agreed. This allows a client, whether it be a landlord or a tenant, to take proper advice in order to make an informed decision and avoid signing up to terms they may otherwise be completely ignorant of. In addition to rights under the Landlord and Tenant Act 1954, the cost of the grant of a new lease (or a renewal) may include such terms.

​​More information

In our experience, both commercial landlords and tenants cannot seek legal advice too early when dealing with commercial lease issues. Our skilled team of solicitors can handle all aspects of your commercial property needs. We can quickly identify issues and discuss the best course of action for your business. Contact our Commercial Property Department to find out more.

 
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