A lease is a contract between the landlord and tenant. Like all contracts, it is negotiable. A tenant should understand the basic lease terms before entering into negotiations to take on a new lease. As the tenant, you are likely to find yourself negotiating the lease with an agent, rather than the landlord himself. Whilst you might think that the agent is neutral, they are in fact paid to market the premises for the landlord and to negotiate the best deal for them, not for you.
The savvy operators will always speak to a solicitor early on in the process to ensure that negotiations are strategically considered. Usually, after an agreement in principle has been made, the agent drafts a ‘heads of terms’ document (often referred to as the ‘HoTs’). This details the principal terms and is circulated to solicitors as the starting point for them to draft the legal documentation.
The following is a list of the main commercial terms that you will need to agree as part of the HoTs:
Duration of the lease
Leases of commercial premises nowadays seldom run for longer than 10 years. Tenants should usually expect to have the right to end the lease early (a break clause) in leases of 6 years or longer. A break clause gives you as a tenant the vital flexibility of being able to terminate the lease early. It is also an easier way out of a lease than trying to sell it on or subletting. Usually, when negotiating a break clause, the landlord will want to insist it is mutual i.e. the landlord can serve notice to break the lease as well as you. You should try to resist this if at all possible as obviously you do not want the landlord threatening to break the lease if your business is doing well!
You may hear or see reference in the HoTs to the lease being ‘excluded from the protection of the Landlord and Tenant Act 1954 (the “Act”)’. The Act gives business tenants the right to renew a tenancy when it comes to an end. If the landlord refuses to allow for the lease to be automatically renewable you may want to consider a longer lease term.
To get an idea of what a fair rent is for the premises, you should find out an average rent for other similar properties in the area. Often there is more payable than just the basic rent – including, building insurance, utility costs and so on. You should also check if the landlord has opted to charge VAT on the rent as this will inflate the rental figure you actually pay in real terms.
Leases for a term longer than 5 years normally contain rent review clauses which allow the Landlord to initiate a review of the rent at set intervals. Landlords normally stipulate that rent reviews should be upward only so do not expect your rent to go down! It goes without saying that the longer the interval between rent reviews the better as your rent will remain stable.
It may be that you want to make changes to the premises to fit them out for your particular use. In such circumstances you should ask the landlord for a rent free period in order to compensate you for the time and costs of making changes. Rent free periods are common in the current market and will improve your cash flow.
Another issue you will need to consider when negotiating the lease term and rent is stamp duty land tax (SDLT). SDLT on leases involves a complex calculation and the amount payable (if any) will vary according to the length of the lease term and the amount of rent. One way of reducing SDLT liability is to take a shorter lease term.
If the premises form part of a larger building, the landlord may also charge a service charge. A service charge covers the costs of maintaining and repairing the shared areas of the larger building. So that you can get an idea of your likely financial obligations under the service charge you should ask the landlord to estimate the average year’s service charge,how this is calculated for the premises and to confirm the service charge for each of the last three years. If there is a service charge, you should request that it is capped to avoid a very nasty shock when the landlord asks you for your share of the cost of something significant such as replacing the roof!
Being liable for repairs can be very onerous for a tenant. You do not want to find yourself responsible for extensive repairs way out of proportion to the length of time you will be renting the premises. You should, therefore, negotiate repairing obligations which are appropriate to the term of the lease and, significantly, the condition of the premises. If the premises are in anything other than a perfect condition, you should insist that a survey called a schedule of condition is undertaken. A schedule of condition is a record of the condition of the premises at the start of the Lease and it can be made clear that you do not have to put the property into any better state of repair then it was at the start of the Lease as evidenced by the schedule.
A tenant usually likes to be able to deal with their rented premises in the most cost-effective way, even if this means subletting or selling (assigning) the lease – in legal terms, ‘alienating’ the property. Landlords, on the other hand, prefer to exercise fairly strict control over alienation, by seeking a guarantee that any assignee or sub-tenant will be able to pay the rent and perform the tenant’s obligations.
Another area landlords like to control is when structural or other alterations to the premises are to be carried out by the tenant. A normal clause in the lease would state that any such alterations will require the prior written consent of the landlord, but that consent should not be unreasonably withheld or delayed. To save time and costs in the future you should get all signage and initial alterations that you wish to make approved before signing the lease. If you wait until after the lease has been completed, you may be required to complete a formal licence and pay the landlord’s legal and surveyor’s fees.
There are many other terms in a commercial lease. It is far more difficult to renegotiate terms at a later stage than at the time when both landlord and tenant are keen to secure the deal. Make sure you obtain professional advice at the outset, in order to avoid committing yourself to a lease that could unduly restrict you and drain your finances.
One final piece of advice is that the agent may request that you pay the landlord’s legal costs in connection with the lease. It is not standard practice for the tenant to pay the landlord’s costs and so do not agree to this. You may have your own legal costs to pay and it is only fair and reasonable that the landlord pays their own bill!!
For further advice or a quote, please contact a member of the commercial team on 01623 451111