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Commercial Property Leasing Guide

Tenants: Your Commercial Property Leasing Guide

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Commercial Property Leasing Guide

Leasing commercial premises is much more than just paying rent.

It goes without saying that if you are ready to move into a commercial property – or if you are upscaling your business and need bigger premises – you will have done your market research.

This will include looking at:

  • Location
  • Size of premises
  • Security requirements
  • Footfall
  • Transport links
  • Proximity to competitors
  • Cost of fit out.

You also need to factor in:

  • Service charges
  • Maintenance, repairs
  • Fees to parties such as solicitors (in some circumstance legal fees for your landlord) and surveyors
  • Business rates
  • Utility bills.

However, this is just the start because negotiating with a landlord could be the difference between succeeding and failing.

What happens all too frequently is that everything runs well until the lease expires and all 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 was not highly tuned to your requirements at the outset, it could create an opportunity for your landlord to recognise a flourishing business and increase your rent on renewal.

This is an issue that should have been dealt with when the agreement was drawn up originally.

Pre-planning

A lease can work well for you and your business, and better pre-planning can save you a lot of time, stress and money. 

As part of your business plan, you must calculate what you can afford, whether the property will be suitable for you – even past the length of the initial agreement – and if it can sustain your growth plans. 

This needs to be balanced by making sure you are not taking on premises that are too big for your current needs and bank balance. 

Then, before racing ahead, have some contingencies in place: what would happen if things go wrong? What if the market crashes or if things don’t go to plan? Does your agreement include a break clause? What happens if you need to move out of the property before the term ends?

In this handy guide – Tenants: Your Commercial Property Leasing Guide – you will find some invaluable information that will help you to overcome some of the potential pitfalls and will enable you to assess the options available to you.

This guide will help you to ask the right questions and consider the fuller picture and to plan ahead as well as highlighting some of the risks. 

However, it is only guide and you should always seek expert legal advice on any commercial property matter.

Tenants: Your Commercial Property Leasing Guide

Rent

The terms of a lease show:

  • The level of rent
  • If VAT is included
  • Due dates of the rent payments.

When negotiating with the landlord, establish a rent-free period as this enables you to undertake amendments, alterations and improvements immediately to make the property fit for your business purposes. These must be agreed with your landlord and any other parties for development permissions.

Rent reviews are built into contracts, so make sure you understand what this is. Typically, lease agreements for properties over five years have a review scheme, so seek specialist advice from your commercial property lawyer and surveyor. 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.

You may be asked to pay a rent deposit, which your landlord holds as security against potential risks such as non-payment of rent or other breaches of your contract with them, or a personal guarantee where the tenant is a company.

Service charges

Although often included in the rent agreement, service charges are a separate issue for negotiation. Make sure you are fully aware of the payment terms and ask your commercial property lawyer for advice.

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

This is a question that you may not ask yourself – but you should. The premises may be ideal for your needs and the rent is reasonable, but can you actually use the premises for the purpose you intend?

Do not rely solely on what the landlord tells you as you may find that due to planning permission, you are not allowed to operate. This can be a costly mistake.

Your local authority’s planning department should be able to shed light on this and speaking with your specialist commercial property solicitor will also eliminate any doubts. 

Another point to think about is that if you are leasing a shop in a shopping centre, the landlord may want a variety of businesses there, so it is also important the landlord is fully aware of what your plans are now and if you expect to diversify or change later.

Who pays for damage and repairs?

Do not assume the landlord takes responsibility for all issues relating to the property you are leasing.

You might be surprised that if you suffer a leak it could be your responsibility. If the leak is because of substantial damage to the roof, which now needs to be replaced, and you have to foot the bill, it could be a disaster for your business.

Most leases are full repairing and full insuring leases (FRI Leases) so make sure you have expert advice on the interpretation of repair because you may have to keep the property in good repair – another expense to account for.

There is often a section in the lease where the parties agree to a Schedule of Condition. It is essential you understand this and keep on top of the requirements of this schedule. Signing a Schedule of Condition without understanding it – or without reading the small print – can be risky. Ask your surveyor to check the condition of the property and ensure your commercial property lawyer explains the agreement and what it means. 

It could mean the difference between taking on a premises and walking away.

Lease terms

Negotiate a lease term with the landlord but be aware of potential pitfalls. While it can be attractive to sign up for a longer term in exchange for a reduction in the rental costs, it is important to look beyond the rental savings. 

Longer terms were once common, but with a fluctuating, uncertain market, businesses (particularly smaller ones) tend to negotiate shorter terms, which help to 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.

Negotiating an early release

It is imperative that you negotiate a break clause in your lease. Often seen as an afterthought by an inexperienced tenant, the break clause can limit your risk of owing the remainder of your lease agreement term should you vacate the premises early. 

Make sure you understand fully the specific clauses within the break clause 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 are strict when it comes to ensuring your obligations have been met, even if you feel you have gone above and beyond to remedy certain aspects such as repair and upkeep. These obligations include repairs, upkeep, rent payment and service charges as well as other obligations you agreed to from the outset.

It is a good idea to make sure that all obligations are met and scheduled into place because not doing so could invalidate your break clause and you would be in breach of contract.

Take specialist advise from an experienced commercial property lawyer when it comes to break clauses.

What security does a landlord require?

A landlord requires security on their investment and this section of the lease agreement requires expert legal advice. You may need to provide a personal guarantee or a guarantor, and 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 make sure you know your risk and seek a solicitor’s advice.

The other common form of security for a landlord is a rent deposit – there are two options:

  • The landlord could take ownership of the rent deposit, hold it on trust and repay it, according to the terms and obligations you have agreed to carry out from the outset.
  • 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 there is no standard lease and all require full understanding and planning, you need to think carefully about insurance arrangements. It is common for the landlord to pay for the buildings insurance and you pay part of the premium, but this is not always the case.

Other business insurance is your responsibility and may include:

  • Employers’ liability insurance
  • Professional indemnity insurance
  • Contents insurance
  • Public liability insurance.

What are my options at the end of a lease?

This is the security of tenure and it’s important you get it right because you must plan for all eventualities so you have the most options available when the time comes to consider extending the lease or vacating the premises.

As with the section on break clauses, if you need to leave you must plan this advance and abide by the terms of the contract as you may need contractors to carry out work, from general maintenance to bigger projects and attention to serious dilapidations. 

It is important you as a business understand and manage the schedule of conditions and seek 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. 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 is a general guide that looks at some of the problems tenants can face when entering into a lease agreement for commercial property. Each commercial property transaction is complex and each one has its legal challenges, so taking advice from an experienced lawyer is a must. It can make the difference between a successful business and one that fails.


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