Getting the use right


Author: Zevi Prager


When considering taking a retail lease of a property, the most important point in the heads of terms from the tenant’s perspective will be its ability to trade or carry out its services from the property.  If it is unable to do so then the property will be useless to it.  However, when drafting heads of terms, tenants and agents often do not put much thought into the implications this can have down the line.  This article will set out the issues to be considered by tenants.

Wide vs narrow

User clauses can be drafted widely or narrowly.  A wide user clause may allow the tenant to use the property for any use within Classes A1, A2 and A3 of the Town and Country Planning (Use Classes) Order 1987 as amended (Order).  A narrow user clause may say that the tenant should not occupy or allow the property to be used other than as a hairdresser’s salon within Class A1 of the Order.

Having a narrow user clause restricts a tenant’s ability to assign/sell or underlet the property.  If the tenant finds a purchaser (assignee) or an undertenant who wants to use the property for a different purpose from the one permitted by the lease it will need to obtain the landlord’s consent to a change of use and will be responsible for its fees.  Below we will discuss whether the landlord can withhold consent.

Another issue with having a narrow user clause is if the tenant has other ancillary purposes which it intends to use the property for.  This could include having an office at the property or using part for storage, etc.  It could be argued that the tenant may be in breach of the lease by using the property for a purpose which is outside the permitted use under the lease.

Having a wide user clause, however, may have a significant effect on the rent achievable in a rent review.  A widely drafted user clause could result in the hypothetical lease being for a use which is available to a larger portion of the market.  Having more possible willing tenants for the property could attract a higher rent which would be to the tenant’s detriment.

Changing use

Another consideration for tenants should be the ability to change the use in the lease.  This would normally be caveated by the landlord that the tenant would have to obtain the landlord’s prior written consent for the change of use, such consent not to be unreasonably withheld or delayed by the landlord.  Without such a clause the tenant would be restricted in its ability to market the property in order to assign the lease or underlet the property (as mentioned above).  To change the user clause, the tenant would need to apply to the landlord for consent to enter into a licence to change the permitted use in the lease.  The tenant would be responsible for the landlord’s legal fees, and possibly administration fees as well, in preparing and negotiating the licence to change use.

If the lease does allow the tenant to change the permitted use, subject to the landlord’s prior consent, section 19(3) of the Landlord and Tenant Act 1927 provides that if the change of use does not require any structural alterations to the property the landlord cannot demand a fine from the tenant in order to grant the consent to the change of use.  The landlord would therefore not be able to demand an increased rent as consideration for giving consent.  However, the landlord would be able to demand payment of a reasonable sum as compensation for the diminution in the value of the property as a result of granting the consent.

If the user clause does not specify that the landlord’s consent cannot be unreasonably withheld or delayed then the landlord would be able to prevent the tenant from changing the use.  The landlord may use this as a bargaining tool to get the tenant to agree to something else, such as a higher rent at the next rent review.

To counter this, a well advised tenant may wish to have either a wide user clause or a provision in the lease allowing it to change the permitted use under the lease to any use within, for example, Classes A1, A2 and A3 of the Order without requiring the landlord’s prior consent.  This gives the landlord the advantage of protecting the use of the property whilst giving the tenant flexibility as well.

Non-compete

Landlords who own parades of shops or a shopping centre will often include a provision in the user clause that the tenant cannot use the property for a use which competes with other tenants within the parade/shopping centre.  This is to ensure that there is a good tenant mix within the parade/shopping centre in accordance with good estate management.  Whilst this may restrict the marketability of the property to potential purchasers/assignees it benefits the tenant as well, as it will have the assurance that its competitors will not be able to take a lease within the parade/shopping centre.

Zevi Prager, Associate, Fladgate LLP (zprager@fladgate.com)

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