Are you considering taking on a commercial lease?

Are you considering taking on a commercial lease?

The declining high street is all over the news headlines as businesses are facing financial difficulty and increased competition with online retailers. Inevitably this is leading to the closure of high street stores and commercial premises becoming available to rent. This blog aims to draw your attention to the key provisions you need to be aware of when considering taking on a commercial lease.

Rent

The rent will be a figure which is to be paid sometimes monthly, but often quarterly on set rent payment days. These days are set out in the lease. Think about any additional charges that may be due under the lease, in addition to the rent. These can include service charge, insurance and business rates.

Term

This is the length of the lease. Make sure this is as you expected. If you are taking on a lease, be aware that you will take the lease on until the end of the term, whether you are trading or not. You may be able to transfer the lease to someone else but this will need the landlord’s prior written consent and is not straightforward.

VAT

Find out if VAT is payable. This can increase the cost of the rent (and other sums) by 20%, it is therefore crucial to know if this will be payable when you decide if you can afford the lease.

If you get registered for VAT then you will be able to claim the VAT back but this could have cash flow implications for you.

Insurance

Who insures the property? Is this your responsibility or does the landlord insure the property? For most commercial leases, it is the landlord who will insure the property and you, the tenant will pay him for it.

Service Charge

If the property is part of a larger building with shared areas, it is likely that there will be a service charge payable for the maintenance of these areas. This is usually an annual fee and can include services such as: cleaning, maintaining and repairing lifts, roofs and toilets. It is likely to go up over the years.

Stamp Duty Land Tax (SDLT)

Does the lease fall within the threshold for SDLT purposes? Ask your solicitor to check this for you. If SDLT is payable, this will need to be paid within 14 days of completion of the lease. Fines are applicable for late payment submissions. This is another expense to bear in mind when deciding to take on a lease. It may also be necessary to register the lease at the Land Registry.

Repair obligations

Repair obligations vary dependent on the type of lease. It is vital to check what the repair obligations in your lease say, as some can be very onerous on you, the tenant. For example, if a property is in disrepair at the date of the lease, a covenant to put and keep the property in repair may well require you to bring the property up to a good standard of repair and maintain this standard during the length of the lease. This could be at a substantial expense to you. A schedule of condition is a document used to give a snapshot of the condition of the property at the start of the lease. This provides certainty to both the landlord and you about the condition of the property and the tenant doesn’t usually have to improve the state of the property beyond this condition. Where it is practical to do so, we would recommend you inspect the property properly before entering into the lease to ensure you are fully aware of the condition the property.

Rent Review

The rent may well be reviewed, usually every 3 to 5 years if the lease is a long one. Rent review dates will be set out in the lease. Rent reviews can be based on inflation rates, can be a set figure agreed at the outset in negotiations, or can be set by an expert who assesses the going market that is appropriate, taking into account all circumstances. Most rent review clauses are upward only, which means that rent will either stay the same or go up but can’t go down. Rents are very flat at present for most properties and tenants should not agree to review provisions that will lead to substantial increases.

User Clause/Permitted Use

The user clause confirms what the permitted use of the property is. You should check what the current or permitted use is because you may need to get consent from the landlord, (and/or from the council) if the use stated in the lease is not the use you intend for the property.

Break clause

A break clause allows you, the tenant to end the lease early by giving notice to the Landlord. Exercising a break clause brings the lease to an end. Be sure to check if the lease contains a break clause; if so, note this date down so it is not missed.

If you’re entering into a brand-new lease then such a clause may be included by negotiation, as can many of the provisions discussed above.

Security of Tenure

Business leases are protected by the Landlord and Tenant 1954 Act. This means that, when your lease comes to an end, you could well have the right to renew on largely the same terms as the current lease (apart from rent which will be re-assessed) because you have what is called ‘security of tenure’. If the lease is contracted out of (i.e. excluded from) the Landlord and Tenant 1954 Act you will not automatically be entitled to a lease renewal at the end of the lease and will have to move out of the premises if a new lease is not agreed.

If you need some advice on a business/commercial lease that you are thinking of taking on, please do get in touch with our commercial property team on 01904 624 903. They’ll be happy to advise you on all applicable issues and tell you how much it’s going to cost.

Guest Walker
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