The user or use clause in a lease says what businesses you can carry on at the premises – in other words, what you can “use” the premises for.
The landlords will not leave it to you to decide what businesses you can carry on at the premises. They will impose some limits. It’s important that you are happy with these limits when you negotiate the terms of the lease,
First, let’s look at what a wide user clause would look like. This would not say that you could carry on any particular named business, it would say you could use the premises for any use permitted by planning law. That’s the most you would be allowed to do anyway. This is because every property is subject to some limitations imposed by planning law on what it’s allowed to be used for.
If you are taking a lease without rent reviews, then the choice is easy – insist on a wide user clause. If there is a future rent review, I personally would still prefer future flexibility over a theoretical effect on rent.
The law is contained in Use Classes Orders which put the various possible uses for properties into various categories known as ‘Use Classes’. For example, Class E(a) means “display or retail sale of goods, other than hot food” – broadly a shop use – and Class E(b) means “sale of food and drink for consumption (mostly) on the premises” – broadly a restaurant use.
A wide user clause would say that you can use the premises for any purpose within Class E(a). (This only works if that class of use is actually the use applicable to the property obviously.) This wide restriction suits you in some ways, but not necessarily all. It suits you because it allows you to carry on whatever business you choose, within the parameters of what’s allowed by planning law. It also means that if you ever want to sell the property to someone else who wants to start up a different kind of business in the premises, can do so without worrying about the new type of business not being permitted by the restrictions on the lease.
The downside of this from your point of view it is at rent review time. The rent review will be done on the basis of the potential open market value rent of the premises. The open market rent for a property with a wide-ranging list of possible business uses is higher than one which is very limited – because it could appeal to a wider range of possible tenants. For this reason, landlords are often happy to have a wide user clause.
At the other extreme, the landlords may propose a user clause in the lease which limits the use of the premises to something very specific – for example, a hairdressing salon.
The drawback of a very restrictive user like this is that it would mean that, if you ever want to get out of the lease and assign it to another business, you could only assign it to a hairdresser. There may be far fewer hairdressers looking for premises at the time and all the other potential business start-ups are excluded.
On the other hand, just as the wide clause increased potential rent at the rent review, so a very narrow clause will have the effect of reducing the potential open market rent – and therefore the rent you will be likely to pay after the review – because the number of potential tenants is drastically reduced to hairdressers only.
It’s up to you which benefit you prefer. If you are taking a lease without rent reviews, then the choice is easy – insist on a wide user clause. If there is a future rent review, I personally would still prefer future flexibility over a theoretical effect on rent.
There is middle ground. The landlords specify your initial use of the premises in the lease – hairdressing salon – but adds words like “or such other use as the landlord acting reasonably may approve”. This means that the premises are not restricted only to a hairdressing salon – they can be used by an incoming assignee for something different, as long as they get the landlords’ consent in advance for that new business. The landlords’ consent is going to be needed anyway for the assignment to the new tenants, so it doesn’t add to the delay particularly if an application for consent for the new type of business is included. The additional wording gives you some comfort about the ability to assign the premises when you’re not also selling your business. It gives the landlords some control without depressing the potential rent at a rent review the way a “this business and this business only” type restriction would do.
If it’s a hairdressing salon, is it allowed to do nail extensions!?
There are legitimate reasons why landlords would want to exercise control over the use to which the premises can be put, even within the restrictions imposed by planning law anyway. If you’re in a parade of shops, the landlords may want to make sure individual tenants aren’t competing with each other. You also won’t want there to be a row of hairdressers.
The danger to your existing business of agreeing to too narrow a user is that if you want to add some component to your existing business, you may find that the wording of the user clause prevents it. If it’s a hairdressing salon, is it allowed to do nail extensions!?
There is some protection to you in such situations in that if you are subject to a specific use, other uses that can be said to be ancillary or incidental to it may automatically be permitted. But you don’t want to rely on this non-guaranteed let-out.
Saying that the premises can be used for uses permitted by the Use Classes Order is a good way of dealing with the situation. But one further word of caution. If the clause says that you must use the premises only for a named class, you must make sure you are referring to the correct Use Classes Order. There have been several re-drafts in recent years and a particular class may not mean the same thing now as it did in an earlier Use Class Order years ago. So you need to make sure, if you are going to refer to a particular class, that you specify the right Use Classes Order by its date.