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Glossary
Agent Fees
This is the remuneration which is payable to a commercial property agent for services performed, usually arising from a disposal or acquisition transaction. A commercial property agent appointed to identify suitable premises or dispose of an interest, will normally expect to charge about 10% of the first years rent, or in the event of a purchase/sale, between 0.5% – 2% of the finally agreed sale price. Both fee levels would usually be exclusive of VAT and disbursements.A commercial property agent acting on your behalf can negotiate appropriate lease terms or freeh… » Read More
Asset Valuation
In property terms, an asset valuation is the expression applied to the formal valuation of land, offices and buildings or plant and machinery. The term is generally used to describe an expert opinion of the open market or existing use value of offices or property. An asset valuation can be incorporated into company accounts, where the ownership of the asset is not necessarily being transferred, but the valuation is of interest to, say, shareholders. It is also used for establishing the value of an asset for company takeovers, share flotations or mortgages.The Roya… » Read More
Assignment
An assignment of a lease takes place when the tenant (assignor) transfers/sells to another person (assignee) their entire interest in the property for the unexpired residue of the lease. Section 52 (1) of the Law of Property Act 1925 requires that for the legal estate to pass to the assignee, then the assignment must be by Deed.Under the doctrine of “privity of contract”, the original tenant remains liable to perform all the covenants in a lease throughout the term. Thus, if the lease is assigned to a third party, in the event that the new tenant defaults, the ori… » Read More
Auction
An auction is a sale which takes place, usually in public, when an office or property is sold to the highest bidder, provided the amount of money offered reaches the reserve price. The sale process by auction is immediate, with exchange of contracts being achieved on the “fall of the hammer”. A reserve price is the lowest price the vendor is prepared to accept and the property will not be sold unless the reserve price is reached or exceeded. In most cases, a guide price is also available from the auctioneer.In the case of disposing of a property, auctioneers usual… » Read More
Break Option
A ‘break option’, ‘break clause’ or ‘option to determine’ is a clause in a lease which gives either the landlord, tenant, or both, a right in specified circumstances to terminate the lease before it’s contractual expiry date. The break option will usually define the length of notice to be given by either party in order to operate it and any other conditions. A break clause may also be subject to contractual or statutory financial provisions that need to be complied with in order for it to be legally binding.In addition, it can also be linked to a rent review date… » Read More
Building Insurance
This is an insurance policy which covers the landlord against damage, destruction and loss of rental for their building, against the usual perils. The tenant of a commercial lease is usually responsible for reimbursing the cost of the landlord’s premium. » Read More
Building Survey
A building survey is an examination of a building by a surveyor (which may include specific tests by the surveyor or other experts) in order to produce a report on the structural integrity of a building and the state of repair. Such a report would usually cover the condition of the structure, incidence of any defects to the fabric of the building and the state of repair of fixtures and fittings, services and plant installations.Depending upon the instructions given to the surveyor, these physical features would also be described in relation to safety, stability, s… » Read More
Compulsory Purchase
This is an acquisition in accordance with statutory procedures and practice, of interests in land or rights, by a public or private body empowered to do so by an Act of Parliament, and authorised so to do by an appropriate Compulsory Purchase Order. Such a process entitles the purchaser to deprive the, usually unwilling, owner or occupier of their property, upon payment of compensation, as provided for by statute. There are a number of rules and regulations governing the assessment of compensation, which not only relate to the value of the land and buildings, but… » Read More
Contaminated Land
This concept is governed by a statutory framework, the most relevant being the introduction of new regulations into Part IIA of the Environmental Protection Act 1990 by the Environment Act 1995. These regulations impose a clean up liability where land is contaminated by substances that are causing, or likely to cause, significant harm or water pollution. The Local Authority is primarily responsible for taking regulatory action and identifying contaminated sites. In general terms the liability for clean up falls upon the persons who have caused or knowingly permitt… » Read More
Contents Insurance
This is essentially an insurance policy, which covers the tenant against damage, destruction and loss of their goods and chattels. » Read More
Fit Out Costs
These are costs which are usually incurred by a lessee prior to being able to occupy any new or alternative accommodation. Fit out items will include a range of goods from the erection of partitioning, installation of electrical or telecommunications cabling, through to purchasing furniture. Fit out costs will vary according to each tenant’s particular requirements and it may be possible to obtain a landlord’s contribution towards the expenditure. The amount spent on fit out costs is usually written off over the duration of a tenancy. In the circumstances it is im… » Read More
Fixtures and Fittings
A fixture is usually an item that has been annexed to a property to such an extent that it becomes part of it, i.e. the article cannot be removed without significant damage to the land or building. A fitting is more commonly regarded as an item that is easily removable from the land or building. Items may be defined as either landlord’s or tenant’s fixtures and fittings. Landlord’s fixtures and fittings are usually non structural/non material parts of the property which are present at the start of the tenancy; such as lightweight or demountable partitions, purpose… » Read More
Freehold
The term freehold is used as shorthand for the tenure of an estate in land which exists in “fee simple absolute in possession” and identifies the ultimate owner of a property. Such ownership usually includes not only the surface land or building, but also the sub surface of a property and all the air space above.As part of the aim of simplifying the conveyancing process, the Law of Property Act 1925 set out two estates or interests in land, namely the “fee simple absolute in possession” or ‘freehold’ and the “term of years certain” or ‘leasehold’. » Read More
Ground Lease
This is usually a long lease, granted at a ground rent but subject to an initial premium payment. A ground lease can vary in length from 30 years up to 999 years. The principle of a ground lease is that the rent paid relates to the value of the land only. The terms of the tenant’s lease usually provide an obligation to develop the land. The building is then owned by the tenant, usually free of any rent. Ground Rent levels vary from a peppercorn, i.e. nil rent, to a percentage of the open market rack rental value of the building. » Read More
Incentive
An incentive is a payment or concession that often arises when a lease is first granted or subsequently assigned during the course of its term. A common example might be where a landlord pays a new tenant a sum of money to take on a new leasehold contract.This sum may be in the form of a capital contribution towards the tenants initial fit out costs. Or it might be in the form of a rent free period or stepped rent until the first rent review date. » Read More
Incentive Fee
An ‘incentive fee’ or ‘contingency fee’ is a charge related to the degree of success achieved in the task for which it is payable. A client may agree an incentive based fee for property instructions with their appointed commercial property agent or surveyor. For example, in rent review cases an incentive based fee, if appropriate, is usually based on the degree of success achieved in the negotiation that takes place between the parties. Thus, in the case of representing the landlord, the higher the level of the revised rent achieved, the greater the fee payable to… » Read More
Landlord and Tenant Acts
These are a statutory framework for the occupation of a building or land where a landlord and tenant relationship exists. Business tenancies were first given protection and an entitlement to compensation by the Landlord and Tenant Act 1927. This act was substantially amended by the Landlord and Tenant Act 1954, which now forms the main legislation for owners and occupiers, although further amendments were made by the Law of Property Act 1969.In essence the 1954 Act provides a business tenant with (i) security of tenure and the right to apply for a new tenancy, sub… » Read More
Lease Expiry Renewal
The Landlord & Tenant Act 1954 limits the way in which a business tenancy may come to an end. Thus a tenancy or lease that falls within the provisions of the Act, will not come to an end unless it is terminated in accordance with the provisions set out in the Act. The statutory methods of terminating a lease are set out in Part II of the 1954 Act. Namely: (i) by a Landlord’s notice under Section 25 (ii) by a tenant’s request for a new tenancy under Section 26, or (iii) a tenant’s notice to quit under Section 27.The landlord and the tenant must comply with t… » Read More
Leasehold
The Law of Property Act 1925 simplified the conveyancing process by creating two “estates” or interests in Land. One is leasehold. One is freehold. The freehold estate or “fee simple absolute in possession” and the Leasehold estate, or “term of years certain”. Leasehold is therefore an estate in land which is held for a term certain, or on a periodic tenancy basis, for a length of time less than the landlord’s interest.A lease usually provides the tenant with exclusive possession of demised premises, for a definite period, in exchange for a payment in the form of… » Read More
Legal Costs
These are the legal costs incurred by both a purchaser and vendor of a property, or in connection with the sale or grant of a new lease by a landlord and a tenant. Such costs can include conveyancing fees, litigation advice, counsel’s opinion, stamp duty (controlled by the Exchequer), local authority search fees, bank transfer fees and court expenses, plus other disbursements and VAT.Since Legislation is constantly being updated, it is advisable to instruct a solicitor to assist in the preparation of all sale contracts or lease documentation. Fees will vary consid… » Read More
Length of Lease
A lease is a legally binding contract between a landlord and a tenant which sets out the basis on which the tenant is permitted to occupy a property. The length of lease of the term will vary depending upon the particular requirements of the landlord and the tenant and will be influenced by business requirements, investment strategy and general matters such as economic conditions.In broad terms, the landlord will often seek to create a lease of between 15-25 years, whereas the tenant is more likely to require a shorter term of 5-10 years, particularly in times of… » Read More
Licenses
Licenses are essentially the lawful grant of a right to do something which would otherwise be illegal or wrongful. A licence does not transfer any “interest” in land, but it may authorise the occupier (licensee) to enter the owner’s (licensors) land for some specific purpose.A licence does not provide a licensee with security of tenure of rights as set out in Part II of the Landlord and Tenant Act 1954, although the distinction between a “licence” or a “lease” is not always clear. It is essential that a licence is documented correctly and that the parties’ obligat… » Read More
Loan Valuation
In most cases when a party lends money for the purchase of a property interest, the lender will require a loan valuation. This is to ensure that the value of the asset meets the security and equity criteria of the loan contract.It would be usual for the lender to appoint a person or firm that is independent from the property transaction to provide the loan valuation. Such a person or firm would usually be a suitably qualified surveyor.In the case of a surveyor that is a member of the Royal Institution of Chartered surveyors, it is mandatory for the member to prepa… » Read More
Local Authority Searches
Local authority searches are essentially an application for an official search of the Local Authority’s records, for written confirmation or a certificate disclosing matters or encumbrances affecting the land. Where a lease is being granted or conveyancing takes place, a local authority search should be undertaken.Typical information that might be revealed by a local authority search includes: (i) ownership of roads and sewers affecting the property. (ii) any road widening schemes in the vicinity of the property. (iii) any breaches of planning legislation…. » Read More
Private Treaty
This is the most common form of buying/selling a property and essentially involves a binding private contract for sale to be drawn up between the parties. A sale of a property or investment opportunity by “private treaty” allows the vendor a much greater degree of control over the actual sale process and any specific conditions that should apply. However, unlike a sale by auction, the actual completion of the sale can take considerably longer to achieve.A commercial property agent is usually appointed to manage the disposal process, and a marketing strategy and ma… » Read More
Purchase Costs
With property acquisitions, a prospective purchaser will normally incur “acquisition” or “purchase costs” in addition to the actual purchase price. These costs are essentially legal and surveyor’s fees, VAT and stamp duty. The level of these costs will vary depending on each particular property, the nature of the client/surveyor relationship and any changes in the rate of Stamp Duty imposed by the Exchequer.At present the purchaser of a property sold with a purchase price in excess of £500,000 could expect to have a combined acquisition cost equivalent to about 5…. » Read More
Qualified Surveyor
A qualified surveyor is a person who has a recognised formal qualification to perform a certain task related to a property instruction. There are many different types of qualification. The most well known relates to a person who has been formally elected as a Member of the Royal Institution of Chartered Surveyors (MRICS). The election is made by the President of the Institution and is only made after the surveyor has completed an Assessment of Professional Competence.A qualified surveyor would normally be employed to deal with any formal property matters such as a… » Read More
Rating Liability
A Rating Liability is a charge based on the occupation of commercial land and buildings, administered by the Local Authority. The “Rateable Value” of a property is assessed by the Government’s Valuation Office and can have similarities to the rental value of the property.All Land and Buildings are revalued every 5 years and the current assessment is effective from 1 April 2000. The Local Authority use the Rateable Value to calculate the level of business rates to charge to the property occupier, by adopting a multiplier known as the Uniform Business Rate.An appeal… » Read More
References
When a new tenant enters into a lease, the landlord will normally require the provision of satisfactory references as a condition of the lease being granted. In these circumstances, the tenant is usually required to provide references from a bank, an accountant and two trade references, although this may vary depending on each individual case. » Read More
Repair Deposits
Rent repair deposits are principally a sum of money which is held on an account, for an agreed period of time, to act as financial security in case of default by a party to a contract. The money would usually earn interest at a fixed or variable rate.When new leases are entered into, a landlord will often require a rent deposit from the in-going tenant. The terms of such a rent deposit will vary depending on the financial status of the tenant, but can involve the tenant paying up to 6 months rent in advance. This amount is then held by the landlord in an interest… » Read More
Rent Reviews
Rent reviews provisions in commercial property leases were originally introduced to counter the effect of inflation during the term of the lease. A standard rent review clause will generally require the rent to be reviewed at fixed intervals, usually five yearly, during the term. The vast majority of rent review clauses require the assessment of the open market rack rental value, at the review date, in accordance with specified terms. Some rent reviews are however geared to the tenant’s turnover or profitability, or movement in the Retail Price Index.In the case o… » Read More
Repair Covenants
Covenants in a lease are the terms of the contract between the landlord and the tenant and they specify responsibility for matters arising out of the lease. Normally, a lease will make express provision for one party to repair and maintain the whole or part of the demised premises and for the other party to repair and maintain the remainder.In short leases the landlord will often be directly responsible, while in long leases the tenant will usually take on the obligation for repair and maintenance.For leases held in respect of premises that form part of a larger b… » Read More
Schedule of Dilapidations
This is a list of outstanding repair and maintenance items, that a landlord has assessed as accrued under the terms of a tenant’s repair and maintenance obligations. It is often served by the landlord at the end of the lease in the form of a “Terminal” Schedule of Dilapidations. The tenant is obliged to carry out the outstanding works listed in the schedule or pay damages which represent the cost to the landlord of doing the works.The items in a Schedule of Dilapidations are often the source of dispute between the landlord and the tenant and a court will ultimatel… » Read More
Service Charge
This is a sum of money payable by a tenant on account of services provided by the landlord and is often collected quarterly in advance at the same time as the rent. A service charge usually arises when a property is in multiple occupation, such as an office block or shopping centre.Typical service charge items include the repair and maintenance of the external or structural parts of a building. Also, costs arising from repair and upkeep of common parts, together with managing agent’s fees and a sinking fund.A service charge payment can be capped in order to limit… » Read More
Stamp Duty
This is a Government fixed tax, chargeable on the execution of documents, pertaining to transactions such as Leases, Agreements for Leases and Conveyances. The duty is payable by the purchaser or lessee, and the disposal document can not be adduced as evidence of the transaction unless adequately stamped.The rate applicable is set by Central Government and varies depending upon the value of the transaction.Current rates are as follows: • Up to £60 000 – nil • Over £60 000, up to £250 000 – 1% • Over £250 000, up to £500 000 – 3% • Over £500 000 – 4% » Read More
Sub-Letting
A sub-letting takes place when a tenant grants a new lease for their property, or part thereof, to an alternative occupier, for a period less than the residue of the tenant’s lease. The period of the sub-letting must be at least one day less than the unexpired period of the superior lease.If a tenant attempts to sub let the property for a period equal to, or more than, the unexpired period of their own lease; this operates as an assignment of the term and not as a sub-letting. » Read More
Tenant’s Improvements
The expression Tenant’s Improvements is used to describe a wide range of works, that are usually carried out by a tenant, at their own cost, and usually require the landlord’s prior approval. Tenant’s improvements may not necessarily increase the value of the demised premises, but can have an impact upon the future rent payable by a tenant.Section 19 (2) of the Landlord & Tenant Act 1927 provides that a covenant in a the review period the procedural steps for having the rent reviewed whether or not time is of the essence in the service of notices the basis of valu… » Read More
User Clause
This is a contractual provision within a lease, that specifies the use, or uses to which a property may be put and the uses which are prohibited. The formal classification of “Uses” are set out in the Town and Country Planning (Use Classes) Order 1987 as amended, which is a statutory instrument defining various use classes.The terminology of a user clause contained within a lease is critical in determining whether the use specified is restrictive or open. This aspect can be very important when considering the open market rental value of a property. » Read More
VAT – Value Added Tax
Value Added Tax is a tax that is charged on the supply, actual or notional, of certain goods and services in the United Kingdom. In cases where the landlord has elected to charge VAT on their property, this tax will be payable by the tenant in addition to the rent paid for the demised premises.Currently levied at a rate of 15%, if the tenant is VAT registered, in most cases they will be able to recover the amount charged from Customs & Excise. This tax should therefore be comparatively neutral for most parties, except for the ultimate consumer. » Read More