Tenants: Your Commercial Property Leasing Guide

Whether starting afresh in business or moving to a new business site, if leasing commercial property is your requirement, you do need to consider more than just the cost of the rent. Your business plan should include renting commercial property and starting out on the right foot can make all the difference between success and failure.

As a business owner, you will have done your market research into the different locations that you would consider to be good for your business. Your requirements may be along these areas; security, a good footfall, close to transport links, size requirements, location of your competitors, proximity to potential employees and more. However, considering the bigger picture can really prove a worthwhile investment, as once you have chosen your spot and ‘signed up’, costs, risk and demands from your landlord can quickly ruin your plans if they are done in haste.

As an example, and this is a frequent occurence, everything starts well as you develop your business from your leased premises, but then when the lease expires, your hard work may turn out better for your landlord than you. If your lease agreement has been badly written, or your solicitor gave you advice that wasn’t highly tuned to your requirements at the outset, this can create an opportunity for your landlord to recognise a flourishing business and increase your rent on renewal. This is an eventuality that should have been dealt with as the agreement was drawn up.

There are many other ways in which a lease can work well for you, and your business, and there may also be a number of circumstances where better pre-planning could have saved you a lot of time, stress and money. Remember that you need to account for rent, service charges, maintenance, repairs, fees to parties such as solicitors (in some circumstance legal fees for your landlord), surveyors, business rates and more.

As previously stated, as part of your business plan, you need to calculate what you can afford, whether the property will be suitable for you (perhaps past the length of the initial agreement) and whether it can sustain your growth plans. This needs to be balanced by making sure you are not taking on something that is far too big for your current needs and bank balance. When accepting terms ensure you have satisfied your immediate needs, but also think about things going wrong, perhaps beyond your control, such as the market crashing. What are you left with if things don’t go to plan? You may be tied in to a building that you owe a number of years rent for, but for which you have no break clause? What happens if you need to move out of the property before the term ends?

In the guide below; “Tenants: Your Commercial Property Leasing Guide” you will find information to help you not only overcome some of the potential pitfalls, but also to assess the options available to you for ensuring that your tenancy agreement works for you and your business. It is important to note that this guide will only help you ask the right questions and consider the fuller picture and to plan ahead as well as highlighting some of the risks. You should always seek legal assistance as each business and related properties will need to be seen as a completely bespoke piece of work by your solicitor who will provide a fit for purpose solution for you. 

Rent

The terms of a lease will dictate the level of rent, whether VAT is included and also the dates when the rent is due. Other requirements that you may find related to rent that can be negotiated are rent-free periods where you require to under-take amendments, alterations and improvements to make the property fit for your business purposes. These will need to be agreed with your landlord and any other parties for development permissions. Rent reviews are also something that can be built into contracts and therefore, understanding that rent can be changed after these reviews is important. Typically, lease agreements for properties over five years will have a review scheme and your commercial property lawyer and surveyor will need to advise you on them. The increases in rent may be ‘index – linked’, which is subject to inflation, or related to ‘market rent’, which will take into account the rental market for commercial properties, demand for the property and other more localised conditions.

As with residential tenants, often there will be a rent deposit required which will be held by the landlord for security against numerous risks they may encounter from non-payment of rent or other breaches of your contract with them, or a personal guarantee where the tenant is a company.

Often alongside rent, but a separate issue for negotiation, are the service charges. Make sure that you are fully aware of the payment terms.

Am I allowed to use the commercial property for my intended uses?

This may be stating the obvious but the commercial property you are looking to rent may be perfect for your budget and be the right price but one of the first considerations you need to make is whether you are allowed to use the premises for the purpose you intend. Be careful, even if your landlord is happy with your intended use of the property you may find that due to planning permission, you are not allowed and this can be a costly mistake. Your local authority’s planning department should be able to shed light on this and speaking with your solicitor will also eliminate any doubts. Another point to raise and think about is that the landlord of a shopping centre, for instance, may want a variety of businesses within their vicinity and therefore it is also important that the landlord is fully aware of what your plans are now and if you expect to diversify or change at a later point.

Who pays for damage and repairs for the commercial property?

Imagine that a year into your tenancy rain water starts to leak into the building. You make your landlord aware assuming that they will rectify the problem. Your landlord then shows you the lease agreement you signed twelve months previously that states you are fully responsible. Now imagine that this leak is due to substantial damage to the roof requiring the whole of it to be replaced. This could be a disaster for your business yet it is a common misconception that the landlord will take the responsibility for such issues.

The majority of leases (although not all) that you will encounter will be full repairing and full insuring leases (FRI Leases). Advice should to be taken on the interpretation of repair as you may well have to keep the property in good repair meaning ongoing decorating and upkeep which is another expense that can be overlooked. Within a lease there is often a section whereby the parties agree to a Schedule of Condition and it is vital that you understand and keep on top of the requirements of this schedule. Signing Schedules of Conditions without much care and attention can create risk and it may be a good idea for a surveyor to check the condition of the property as well as you asking your solicitor to explain the repercussions of your agreement. In the above scenario of the roof issue, your surveyor would have flagged this up and you will have been in a position to make an informed decision.

How long should the term of the lease be?

Again, a lease term is up for negotiation and it can be attractive to sign up for a longer term in exchange for a reduction in the rental costs but it is really important to look beyond just the savings. Terms have historically been longer than they are nowadays but with a fluctuating, uncertain market, businesses (particularly smaller ones) have chosen to negotiate shorter terms so that they reduce the potential liability of the business going into administration and being left with a liability of a number of years of rent being owed. Bigger businesses can often accept this risk but make sure you are fully aware of the risks you take on.

How can I get out of my lease early?

Negotiating a break clause in your lease is imperative. Often seen as an afterthought by an inexperienced tenant, the break clause can limit your risk of having to owe the remainder of your lease agreement term should you vacate the premises early. The specific clauses within the break clause should be fully understood and, bear in mind, that for a break clause to be accepted the landlord will often have terms in place that state that you, the tenant have fulfilled your obligations up until exit. The courts take an extremely strict line ensuring that your obligations have been met even if you feel that you have gone above and beyond to remedy certain aspects such as repair and up keep. These obligations include repairs, upkeep, rent payment and service charges as well as other obligations you agreed to from the outset.

It would be a good idea for someone within the business to make sure that all obligations are met and scheduled into place. These can be costly and if you do need to exercise the break clause, it can be a timely affair as there is likely to be quite a long notice period required as well as repair work that contractors may need to carry out. This cannot wait until the last minute as after the date has gone, and work is unfinished, you will have breached the terms of your contract and you cannot expect the landlord or the courts to appreciate the good intent.

Therefore, it is vital that you understand the terms of your break clause and that you seek legal advice should you look to exercise them.

What security does a landlord require?

As with any business decision, a landlord will require security in their investment and will require you or your business to provide this. With the current economic climate, landlords are reflecting on their security more and more, so this is a section of the lease agreement that requires serious thought and legal advice. A personal guarantee or someone else being required as a guarantor may be required and you will need to understand the full implications of this. Your family home and your possessions could be at risk. If there is no other option, you could negotiate the personal guarantee for part of the lease rather than the whole term to limit some of the risk, but again; know your risk and seek a solicitor’s advice.

The other common form of security for a landlord is a rent deposit. Two options are available. Firstly, the landlord could take ownership of the rent deposit, holds it on trust and repays this according to the terms and obligations you have agreed to carry out from the outset. Alternatively, the tenant keeps ownership of the rent deposit and the landlord takes a charge out on this.

Sometimes provision of business accounts is enough or can make up part of the landlord’s criteria, but often this is for bigger businesses or where the business is already known to the landlord.

Who insures the commercial property?

As you can see, there is a pattern emerging with regards to commercial leases and that is; there is no standard lease. They are all different, with clauses and variations that all require full understanding and planning on your part. Insurance is certainly something that needs thought, but it is common for the landlord to pay for the buildings insurance and you will likely be required to pay part of the premium. This is not a strict rule so do not assume this will always be the case.

Other business insurance will be your responsibility and may include: employers liability insurance, professional indemnity insurance, contents insurance, public liability insurance and more.

What are my options at the end of a commercial property lease?

This section is known as the security of tenure and it’s important that you get it right. It is impossible to see into the future with regards to the market and where your business will be. You need to plan for eventualities so that your options are at their greatest when the time comes to consider extending the lease or vacating the premises. As with the section on break clauses, if you require to leave, planning in advance and abiding by the terms of the contract will be required as you may need contractors to carry out work, from general maintenance to bigger projects and attention to serious dilapidations. The schedule of conditions needs to be understood and again, it is worth making it a particular person’s job in your business to make sure this is managed properly as well as seeking your solicitor’s professional opinion.

Provided that you have not breached your terms and the landlord agreed from the outset to opt into the Landlord and Tenant Act 1954, you will have the right to extend your lease should you chose. There are conditions however, where the landlord can evict you or not allow you to extend your tenure, and they will need to serve a notice to quit.

If the landlord has excluded the Act, you will have no right to extend the lease. Consequently, if your business is built up of goodwill and you know from the outset that you will need to stay longer than the original terms outline you should seek advice on how to negotiate on this point.

This guide has been written to highlight some of the issues for tenants when entering into a lease agreement for commercial property. Every individual looking to lease a commercial property will have different requirements, therefore serious thought and advice from a specialist commercial property solicitor could really make the difference for you and your business.

For more information of how we can help you with your property transactions, please contact Richard Egan or Harj Dhatt on 01785 223440 or email them on Richard.Egan@orj.co.uk or Harj.Dhatt@orj.co.uk

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