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The fundamentals of commercial leasing.

Summary: Commercial lease components that landlords and tenants need to understand

By Jeremy Scott, Ian Arnott and Andrew Balfe

Commercial lease arrangements can vary significantly depending on the nature of the property, the relevant tenant's business and the commercial objectives of the parties. Here are some of the fundamental aspects to a commercial lease.

The demise

The first issue to be determined in any lease is what is being demised. The demise is the area of the building or facility designated for the exclusive use of the tenant. Often it is referred to as the "premises". While this may seem a fairly simple exercise, there can be a number of possibilities, each of which has consequences on the obligations of the landlord or the tenant in relation to repairing, maintaining, servicing and insuring the premises or building. We set out some examples of different demises below.

Building demise: The simplest form of demise would be a demise of the entire building or facility to the tenant. This often applies to purpose-built facilities such as factories, warehouses, schools or hospitals where the tenant requires the use of the entire building or facility.

Unit demise: Only part of the building or facility is leased to the tenant. The tenant is only entitled to exclusively use and occupy the part demised. Often the landlord will lease other parts of the building or facility to other tenants and reserve to itself and all tenants the right to use the common areas.

Licensed areas: From a common law perspective, a licence is a right over an area, but to which the licensee does not have exclusive possession, i.e. the area may be shared with others or the landlord or others may have access rights to the area. Licences may also be used for temporary facilities such as kiosks or promotional stands. From a common law perspective, a licence would not be a lease. This distinction between a licence and a lease is, however, less clear in Dubai. Licensed areas may also be included in the lease alongside the demised areas. Examples are rights to terraces for restaurant seating, rights of access to and exit from the premises, car parking rights and signage rights.

Landlord reservations

While "demising" the whole or part of a property gives the tenant exclusive possession, landlords usually reserve the right to enter the premises for various purposes, such as conducting repairs, inspecting the premises to ensure that the tenant is meeting its repair, maintenance and other obligations, ensuring services running through the premises and serving the common parts or other premises are not interrupted, provision of services that the landlord has agreed to provide and in case of emergencies.

It is common for landlords to have to give tenants some notice when they may access the premises, except in cases of emergency.

Fit-out and reinstatement

Once the demise is determined, a common issue would be whether the premises are fitted out and ready for use or shell and core. Shell-and-core premises comprise just the utility service connections, the premises' shell and structure and no suspended ceilings, wall of floor coverings.

If the premises are shell and core or if the existing fit-out is not sufficient, the tenant would usually assume the obligation to fit out the premises. This can be a substantial obligation for a tenant. In addition, the tenant cannot use the space while it is being fitted out. In recognition of this, landlords may agree to a rent-free period, although often a tenant may be required to remove the fit-out at the end of the lease and reinstate the premises to prior condition, excluding fair wear and tear.

Repair and maintenance

A key part to any commercial lease is determining the rights and obligations of the landlord and tenant with respect to repairs and maintenance. As a general rule, the tenant assumes the majority of obligations to repair and maintain the demised area. However, there are exceptions as either the landlord or the tenant may want certain infrastructure to be maintained by the landlord.

Good examples would be civil defence systems such as sprinklers or integrated IT or telecommunications systems. Often a landlord may accept repair responsibility for mechanical, electrical and plumbing systems within the premises. Where only part of a building or facility is demised, the landlord would also assume responsibility for the maintenance and repair of the common parts.

Services and charges

Although related to repair and maintenance obligations, the rights and obligations for the provision of services are best considered separately. Services may comprise utilities, security, cleaning, mechanical, electrical and plumbing maintenance and repairs and many other aspects of the maintenance and operation. The tenant usually accepts responsibility for many services, including utilities and cleaning. The landlord may accept responsibility for certain services within the premises.

A key aspect of any commercial lease is whether the cost of such services, as well as insurance and other landlord costs, are payable by the tenant as "service charges" in addition to the rent or whether such charges are included in the rent.

Insurance and risk

A key aspect for discussion between landlords and tenants is whether tenants are covered by the landlord's insurance. If not, the insurer may recover directly from the tenant who causes damage to the property. Where the tenant does not get the benefit of the landlord's property insurance, tenants should arrange their own insurance for such risks.

A landlord will not insure the tenant's fixtures, fittings and contents and, accordingly, the tenant will need to insure the same. In addition, a landlord may want a tenant to hold other insurances such as builder's risks (during the fit-out) and third-party risks, with such insurance to also benefit the landlord.

The allocation of the various risks as between the landlord and the tenant will usually be set out in the lease as a corollary of the insurance matrix, i.e. each of the landlord and tenant may accept certain risks and be required to insure for them, sometimes with the other party also getting the benefit of this insurance. Landlords may also take out "loss of rent" insurance to cover any period during which the building or facility may be damaged and rent abatements may apply.

The writer

Jeremy Scott is head of real estate, Ian Arnott is senior associate and Andrew Balfe is senior associate at Al Tamimi & Co. The views expressed here are their own.

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Publication:Gulf News (United Arab Emirates)
Date:May 10, 2017
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