Jargon Buster of Commercial Property Terminology

Navigating the commercial property market requires a solid understanding of industry-specific terminology. This glossary provides definitions for essential terms.

• Lease: A legal agreement granting occupation of a property for a specific term in exchange for rent.
• Rent: The regular payment made by a tenant to a landlord for the right to occupy and use a property.
• Landlord: The owner of a property who grants a lease to a tenant.
• Tenant: The person or entity occupying a property under a lease agreement.
• Lease Term: The length of time specified in a lease agreement during which a tenant has the right to occupy a commercial property, usually expressed in years.
• Vacancy Rate: The proportion of vacant commercial property within a specific area.
• Capitalisation Rate (Cap Rate): A property’s net operating income divided by its capital value, used to estimate its potential return on investment.
• Gross Lease: A lease where the landlord covers property expenses like property taxes, insurance, and maintenance.
• Net Lease: A lease arrangement where the tenant covers additional property expenses beyond the basic rent, such as maintenance, insurance, and taxes.
• Percentage Lease: A lease where rent is calculated as a percentage of the tenant’s sales revenue.
• Break Clause: A term in a lease agreement that permits either party, landlord or tenant, to end the lease early, usually under specified conditions and with advance notice.
• Building Surveyor: A professional who assesses the condition of a property and provides reports on its structural integrity and repair needs.
• Business Rates: A tax levied on commercial properties based on their rateable value.
• Capital Value: The estimated market value of a property.
• Chartered Surveyor: A qualified professional who provides expert advice on property matters.
• Completion Date: The date when the sale or lease of a property is finalised.
• Compulsory Purchase: The acquisition of property by a public authority for public use, with compensation paid to the owner.
• Conveyancing: The legal procedure for transferring property ownership, including all the necessary documentation and processes involved in buying or selling commercial property.

Additional Terms:

• Covenants: Provisions within a lease agreement that establish the specific duties and entitlements of both the landlord and tenant, including any conditions or limitations imposed during the lease.
• Deposit: A monetary amount paid by a tenant to a landlord as a security measure to cover potential damages or breaches of lease terms.
• Dilapidations: Damages to a property caused by a tenant not fulfilling their lease obligations.
• Schedule of Condition: A comprehensive report documenting a property’s state at the beginning of a lease, used as a reference to assess any damage or required repairs when the lease concludes.
• Full Repairing Lease (FRI): A lease arrangement where the tenant takes on the responsibility for all repairs and ongoing maintenance of the property.
• Energy Performance Certificate (EPC): A document assessing a property’s energy efficiency.
• Gross Internal Area (GIA): The total floor area of a building, excluding external walls.
• Ground Lease: A long-term lease where the tenant acquires the right to develop and use the land, paying ground rent to the landlord.

Understanding legal and financial terminology is essential when handling commercial property transactions and ensuring compliance with regulatory requirements. Here’s a guide to some fundamental terms you should know:

• Guarantor: A person or entity who commits to covering a tenant’s financial lease obligations if they default.
• Authorised Guarantee Agreement (AGA): A legal document outlining the terms and conditions of a guarantee provided by a guarantor.
• Internal Repairing Lease (IR): A lease where the tenant is responsible for internal repairs and maintenance.
• Land Registration: The process of recording property ownership and transactions in a public register.
• Land Registry: The official body that manages and records property ownership and interests in England and Wales.
• Loan Security Valuations: Assessments of a property’s value to determine the amount of a loan that can be secured against it.
• Managing Agent: A professional who manages a property on behalf of the landlord, handling day-to-day operations and tenant relations.
• Propertymark ( Formerly NAEA): A professional body representing estate agents in the UK.
• Net Internal Area (NIA): The total floor area of a commercial property, excluding common areas like corridors and lifts.
• Rent Review: A process to adjust rent in line with market conditions, as specified in a lease agreement.
• Restrictive Covenant: A clause in a lease or land title that restricts the property’s use or development.
• Royal Institution of Chartered Surveyors (RICS): A UK-based professional organisation that accredits surveyors, establishes industry standards, and provides resources for its members.

Property transactions and documentation cover the critical paperwork and procedural steps required to formalise deals and agreements for UK commercial property, ensuring all legal and financial aspects are properly addressed.

• Service Charge: An amount tenants pay to cover the expenses of upkeep and management of common areas and services within a property.
• Serviced Office Space: Office space that includes additional services like furniture, utilities, and reception support, typically available on flexible terms.
• Non- Residential and Mixed Land Stamp Duty Land Tax (SDLT): A tax levied on the purchase price of a commercial property in England and Wales, paid by the buyer.
• Alienation: The process of transferring leasehold interest through assignment (selling the lease) or subletting (leasing part of the property to another party).
• Tenants in Common: A type of property ownership where each owner holds a separate share of the property. These shares can be inherited by their heirs.
• Title Deeds: Official documents that establish property ownership and detail any associated rights, responsibilities, or limitations.
• Under Offer: A status indicating that an offer has been made on a property and is being considered, but the sale has not yet been finalised.

In the UK, a protected lease is a commercial lease that falls under the Landlord and Tenant Act 1954, granting tenants specific statutory rights. These include:

• Security of Tenure: This means tenants cannot be evicted without a valid reason once their lease term expires, and they have the right to request a new lease under similar terms unless the landlord can prove grounds for non-renewal.
• Renewal Rights: Tenants can request a renewal of the lease at the end of the term. The landlord must offer a new lease or provide grounds for refusal, such as redevelopment or substantial rent arrears.
• Fair Rent: During lease renewal, if the landlord and tenant can’t agree on the rent amount, it may be established by the court, which will assess the rent based on the prevailing market rates and similar properties.

In contrast, an unprotected lease refers to a commercial lease that does not benefit from the statutory protections provided by the Landlord and Tenant Act 1954. This typically applies to leases where:

• No Security of Tenure: Tenants with these commercial property leases lack the right to automatic lease renewal upon expiry. Landlords have the discretion to end the lease without needing to justify their decision, meaning the tenant may need to vacate the property if the landlord decides not to offer a new lease.
• Market Rent: Rent negotiations are based on market conditions without the court’s involvement in setting a fair rent if disputes arise.

Unprotected leases are often used for shorter-term arrangements or where both parties agree to waive the statutory rights, typically involving newer leases or agreements where specific exemptions are applicable.

Understanding a building’s use class is crucial for determining how it can be used and modified under current planning regulations.

• Town and Country Planning (Use Classes) Order 1987: This legislation categorises different types of land and property use into specific classes. It dictates what activities are permitted within each use class and sets out the conditions under which property use can be changed. The 1987 Order, and its subsequent updates, aim to simplify planning regulations and provide clarity on how properties can be used or adapted.
• Common Use Classes and Permitted Changes: The Use Classes Order defines several categories for commercial properties, including Class E (commercial, business, and service uses), Class F1 (learning and non-residential institutions), F2 which covers spaces like places of worship and similar venues that support communal activities, and Sui Generis (unique or specialist uses). Changes within these classes generally do not require planning permission, allowing for greater flexibility in adapting properties to new purposes. For instance, a property used for retail can often be converted to a café or office space without needing additional approvals.

The Town and Country Planning Act 1990 is a pivotal piece of legislation governing land use and development in the UK. This Act establishes the framework for planning control, including the processes for granting planning permissions and the enforcement of planning regulations. It covers aspects such as the preparation of local development plans, the approval of new developments, and the management of land use changes. For commercial property transactions, understanding this Act is imperative, as it influences how properties can be developed, modified, or repurposed, ensuring that any changes comply with local planning policies and regulations.

Familiarity with key terms and legal frameworks can significantly impact your decisions, whether you’re buying, selling, leasing, or managing a commercial property.

For tailored advice and expert guidance, consulting with experienced commercial property specialists is highly recommended. Their expertise can help you interpret these terms effectively and navigate transactions efficiently and with confidence.

Reach out to our experienced professionals for more information.