Building Blocks - Use clauses in commercial leases

Jack Lightburn, Hannah Bristow and Laura Van Eyken consider use clauses in commercial leases and discuss what they are, their importance to both landlords and tenants and some practical points to note.

A use clause, also known as a “permitted use”, “permitted user” or “user” clause, is a clause in a commercial lease which states the use or uses to which the tenant can put the premises. Use clauses may also stipulate whether the tenant is able to request a change to the permitted use during the term of the lease and whether the landlord is required to act reasonably in considering any such request. Leases typically also include general conduct provisions which list certain activities which are prohibited and impose other rules and regulations governing the use of the premises. 

The form of the clause

Use clauses in leases are usually drafted negatively, for example, “Not to use the Premises for any purpose other than as a retail shop”. Tenants should not accept a clause which is positive such as “To use the Premises as a retail shop”, as this could potentially be construed as a “keep open” obligation (for more information on which, see here). 

Permitted Use is often defined by reference to the use classes listed in the Town and Country Planning (Use Classes) Order 1987 (UCO). This statute is updated from time to time, so it is essential to provide for a date on which the reference to the UCO is to be construed, for example the date of the lease or the date a particular change to the UCO came into force. This will avoid future changes to the UCO inadvertently altering the meaning and effect of the use clause, which could potentially disadvantage either party.

Landlord’s considerations

There are many factors for a landlord to consider when negotiating the use clause in a commercial lease. Fundamentally, a landlord will be protecting the long-term value of its interest in the property, and it won’t wish to allow any uses which might adversely affect value. The landlord will also want to prevent any activities from being carried out at the premises which could potentially result in a nuisance to itself or others, cause physical damage or inflict reputational harm. 

There may be estate management considerations if the landlord owns adjoining property, particularly where the premises form part of a retail park or shopping centre. In the case of a shopping centre, the landlord will want to create a balanced and attractive retail environment. This is likely to require a variety of stores along with food, beverage and hospitality outlets. Tight control of the user clauses in the occupational leases can go a long way towards achieving this. 

Some tenants may request exclusivity to ensure there are no competing uses in the immediate vicinity of their units. If a landlord is happy to agree to this, they should keep accurate records of such arrangements and properly document them. There will also need to be appropriate restrictions included in the leases of the neighbouring units and both parties need to be conscious of the fact that arrangements such as this can fall foul of competition laws. 

The landlord will want as much control as possible over the tenant's use of the premises so long as this doesn't reduce the level of rent it can charge, either at the outset or following a rent review. Where there is an open market rent review in the lease, a restrictive permitted use may be disadvantageous, as the tenant will argue that this limits its ability to assign or underlet the lease or to diversify its business, thus reducing the level of rent it would be willing to pay. The landlord needs to find a balance between the level of control it wants over the use of the premises and the impact this may have on the rent it is able to secure.

Tenant’s considerations

Tenants, on the other hand, need to ensure that the use clause is sufficient for their business purposes. They will want some built-in flexibility, both to facilitate their ability to grow or adapt their business model and also to ensure they are able to assign or sublet the lease, should they no longer need the premises. For example, a tenant leasing space for a coffee shop may want to ensure it can later expand to include a bakery or other complimentary food offerings, or perhaps change use to a restaurant to facilitate the needs of assignee or undertenant. It may also want exclusivity, as discussed above. 

Most commercial leases will require tenants to be responsible for complying with all laws relating to the tenant’s use and occupation of the premises, and this will include planning laws. The lease will almost certainly also include a disclaimer to the effect that the landlord is not warranting that the permitted use under the lease is lawful. The onus is therefore squarely on the tenant to check that its intended use of the premises is allowed under planning laws.

If there is an open market rent review, the tenant should be aware that a very wide user clause will have an inflationary effect on the rent when it is reviewed, as the rent review clause will direct the valuer to value the premises on the basis that it can be used for the most valuable use permitted under the lease. For this reason, where there is an open market rent review, a tenant should not accept a permitted use clause any wider than it needs for its business purposes and to meet any need to assign or sublet the lease in future.

Change of use during the lease term

Changes in the tenant's business strategy or market conditions may require a change of use during the lease term. In addition, if the tenant needs to assign or sublet, the assignee or subtenant may want to put the premises to a different use.

Many commercial leases will address the possibility of the permitted use changing during the term and outline a process for the tenant to obtain the landlord’s consent to such a change. Often the lease will say that the landlord’s consent to a change of use is "not to be unreasonably withheld or delayed". If this or similar wording isn’t expressly stated, the landlord does not need to act reasonably in considering any such request. Tenants should always try to insist that wording requiring the landlord to act reasonably is expressly included in the lease. 

Other restrictions and general conduct provisions

In addition to the permitted use clause, many commercial leases also include provisions imposing other more general restrictions on conduct and use. These can include:

• prohibitions on certain activities, such as noisy or offensive trade, illegal or immoral acts;
• a prohibition on the use of the premises outside certain hours;
• an obligation to use the premises in an energy efficient manner and to put in place policies which promote sustainable practices; and
• a general obligation to comply with any regulations designated by the landlord from time to time for use of the premises.

Conclusion

Effective negotiation of use clauses involves a balance between the landlord’s need to protect its investment and the tenant’s desire to meet its business needs and secure operational flexibility. Clear, mutually agreeable terms can help foster a successful, long-term lease relationship and landlords and tenants should always obtain professional advice when negotiating these provisions.

The above is intended as a general overview of use provisions in commercial leases. If you have any questions on the above or require advice in this area, please contact our real estate team.