Thinking of taking on a new commercial lease?

Often the first thing we as solicitors see when instructed on a new commercial letting for a tenant are the already agreed “Heads of Terms”, being the starting point for the basis of the legal documentation. Unsurprisingly, these can often be heavily landlord biased and therefore it is always advisable to engage your solicitor early on in the transaction to see if we can help in negotiating a better deal for the tenant from the outset. Having to go back and renegotiate further down the line can cause unnecessary delays and might not be the best start for the new landlord and tenant relationship.

Here are a few tips on things to look out for when negotiating the terms of your new commercial lease:

1. The length of the lease term

Think carefully about the length of the lease term you are willing to commit to and whether this fits in with your business plan. If you are expecting to spend a large sum on your fit out then you would no doubt not want to have to be considering relocation for some time to come.

Once the original lease term ends you would normally be expected to vacate the premises and the lease will not automatically renew. However, if this would have an adverse affect on your company’s goodwill then you should seek to ensure that the lease is not “excluded from the security of tenure provisions of the Landlord and Tenant Act 1954″. This will mean that you cannot be required to vacate the premises unless the landlord is able to satisfy certain statutory grounds (the most common being that the landlord is wanting to redevelop the property).

2. Can you bring the lease to an end early?

If you are setting out on a new business venture or opening a shop or office in a new location, it is always wise to give yourself an option to bring the lease to an end should things not go entirely as planned. This is referred to as a “break clause” and such clauses are commonplace in modern commercial leases. It will of course be a matter of negotiation as to whether you can be granted the benefit of one or more break clauses throughout the lease term, and the frequency of the option being available.

3. What about the rent?

The amount of annual rent will of course be dictated by a number of factors, including the size, location and condition of the premises, including the length of the lease term you will be taking. Do also be aware that you may also have to pay service charges and insurance rent on top of these sums, not to mention the rates and utility costs. Find out early on whether VAT will be chargeable on these sums, too.

If you are concerned as to the level of service charges, consider requesting that there be a cap placed on such costs.

If you are a new startup company or not known in the location of the new premises then you may also be required to provide a guarantor or a rent deposit – the latter often requiring sums equivalent to 6 months rent being tied up in an account for the duration of the lease. You can however try and negotiate an early release of this sum, for example if rents are paid on time for a certain period or you can otherwise demonstrate financial stability.

Always ask the question as to whether the landlord is prepared to offer you a rent free period – this is more likely to be offered however where the premises are going to require some upgrading by the new tenant or where they have been vacant for a lengthy period.

Any lease granted for a term in excess of 3 years is very likely to include a rent review provision. Rent reviews are not normally more frequent than every 5 years, so do be prepared to resist anything more frequent than this! You should also be clear as to the basis of valuation – normally rents can only be reviewed upwards and they can be linked to the then open market value, stepped increases or perhaps linked by reference to the Retail Prices Index.

4. What is the current lawful use of the premises?

Ask the landlord for evidence as to the current authorised use of the property under the current planning legislation. You may find that your proposed use requires planning consent and there is no guarantee that the necessary change of use will be granted. A change of use application may take a local authority some time to deal with and you might not be able to wait so long!

5. What is the condition of the Property?

Repairing obligations in leases can prove incredibly onerous. You should always consider having a survey undertaken in relation to the property to find out what you are letting yourself in for! If the property is in anything other than tip top condition then we would always recommend you seek to ensure that your repairing obligations are limited by way of a “Schedule of Condition”. This is usually a photographic and written record of the state of the property at the start of the lease and is effectively the benchmark for the condition of the property going forward: the landlord cannot require you to put the property into a better condition than as evidenced by the Schedule and this could save you significant costs at the end of the lease term.

6. Who pays the legal costs?

The general starting point is that each party bears its own costs on a lease transaction, but this could be a matter for negotiation. If there are several potential premises empty and available on a high street then as tenant you are more likely to find a landlord who may be prepared to pay (or give a contribution towards) your legal costs as an incentive to taking their property rather than the one next door. Doing your research as to other available nearby premises can really pay off!

Hopefully the above will give you some useful points to consider when seeking to negotiate the terms of a new lease, but please do feel free to contact any member of our commercial property team here at Guest Walker and we will be happy to assist you with your negotiations at an early stage.

John Walker