Unless a business is lucky enough to own the premises they operate from, most business owners will find themselves negotiating the terms of a commercial property lease at various stages of their careers.
A lease must be put in place when a commercial building is going to be occupied for at least six months or more by a tenant for business purposes. It goes without saying that as a tenant, the business owner will want to get a good deal financially when negotiating a new lease, particularly in the current difficult trading times, where high rents are forcing many smaller and some larger retailers off our High Streets.
The tenant will also be looking for a good deal in terms of the quality of property on offer – does it have air-conditioning? Car parking? Secure entries and exit points? What’s included in the service charge? All these are factors a tenant will need to take into account as well as the rental cost.
Leases are usually in writing and can be as long as 60 or more pages. They tend to include a raft of standard information, including the rent to be paid, space occupied, how long the lease is to last, your responsibilities and rights as well as the landlord’s.
Leases can be complex and can include ‘mini agreements’ known as additional clauses that could have a considerable impact. It’s important to take the advice of a trusted professional at this stage. They can do the negotiating with the agent or property owner on your behalf and secure the best possible outcome for you.
Be aware of the service charge – it’s a major factor so make sure you have a clear understanding of what is included so that no nasty surprises rear their head later on.
Service charges often cause problems because tenants can have a different understanding of what is covered under the charge, compared to what the landlord is prepared to offer. They typically include repairs and maintenance of the building and communal areas, heating and lighting and cleaning. It’s essential to ensure that what is covered under this charge is fair and also look at how the cost is calculated.
A good idea would be to ensure the service charge is capped, particularly when the lease is only short term and the building may be in need of imminent substantial repair.
There is a Code of Conduct for service charges which may give the tenant more rights than those expressed in the lease.
Look at the insurance costs for the building too. Find out who pays for the insurance before committing to the lease. Don’t assume the landlord has provided insurance, and if they have, check it covers everything it is required to. If not, tenants could find themselves open to risk.
Repairs can also be a considerable additional cost. Check who is responsible for the cost of repairs, especially if the building is older and in obvious need for upgrading. Also find out from the landlord what state the building must be in at the end of the lease, so that costs can be put aside for this in good time if required and there is no room for disputes to arise.
Most landlords will ask that their tenant keep their premises in full repair. This means that if at the outset the premises are in disrepair, through no fault of the tenants, it is still the tenant’s responsibility to make the premises good. It is advised that the tenants repair obligation be limited to such, that it need not return the property at the end of the term in any better condition than it was in at the outset. Ideally this should be evidenced by a properly drawn schedule of condition not only showing but describing areas and condition of the building, consequently limiting the tenants repairing burden.
For a new business just starting up and looking to secure its first lease, or a business new to the area (even one which has done its homework to assess the strengths the location has to offer) it is advisable to avoid signing a lease which is longer than 3-5 years. Some leases can be as long as 10 -20 years but unless you are a large and established business this would involve too much of a risk.
One major trap that leaseholders should be careful not to fall into is to commit themselves to a long-term lease that has no option to break out from. That’s why break clauses are so important.
But what is a break clause? It allows both the tenant and the landlord to end the lease before the full term and essentially, protects the business owner if the business falls into difficulty and needs to cease trading.
It’s certainly a good idea to have a break clause included in the lease as it will save a tenant from being personally liable for the rest of the lease costs even if the business fails. If the break clause is timed to coincide with a rent review, this could also give you, the tenant, an option to vacate the premises if the landlord makes unreasonable increases to the rent.
The current economic climate does mean that more and more businesses are failing, and they are unable to pay the rent they are contracted to. It can be attractive to sub-let the property and if there is a clause in your lease allowing this option, then this is acceptable. However if the sub-let tenant does not cover the agreed rental this may not be advisable, after all as the original tenant, all responsibility for the property still lies with you.
Carrying out repairs throughout the course of the rental period will also protect a tenant at the end of the tenancy agreement. This is due to a schedule of dilapidation which could be issued at the end of a tenancy agreement, although they can be issued at any time. The schedule focuses on the repairs needed to reinstate the property and correct any damage done throughout the course of the tenancy, and will directly correlate with the obligations outlined in the lease.
The most contentious time for them to be issued is at the end of a tenancy when the tenant has left the building so to speak. They include a breakdown of all the repairs needed and a cost is associated with each repair.
This is one trap which tenants should do their best to avoid because the landlord will use its own surveyor to estimate the costs, which often leaves tenants feeling aggrieved because they feel they could have done the retrospective repairs themselves for a much more reasonable cost. But once the tenant’s agreement has ended they are not able to access the building.
This is a seriously contentious area for tenants. They can help protect themselves from these schedules by carrying out repairs during the course of the lease on an ongoing basis rather than leaving it all to the end. Disputes concerning dilapidations are complex and many factors need to be considered in challenging and issuing a schedule.
For businesses trading at a loss that need to exit their lease, they may have considered letting the lease go with all personal liability. However, you must be careful when considering this option as most leases ask for a guarantee that will be used if you choose this option.
Tenants need also to be aware of the effect of their landlord requesting that the lease be excluded from the Landlord and Tenant Act 1954.
From the tenant’s perspective, if they are looking to have the automatic option of being able to remain in occupation of the commercial property on expiry of the lease, lease negotiations will focus on the lease being protected under the Landlord & Tenant Act 1954 and what is known as Security of Tenure being included in the grant, ie a rebuttable right to remain in occupation even though their lease has come to an end by effluxion of time.
However, some landlords may want automatic possession of the commercial property, without fear of tenants claiming extended possession and occupation, for example. If they know at the outset that in the future they may want to occupy, redevelop or change the use of the premises (acts that they cannot do with a tenant in possession), then they will want to see that there is no Security of Tenure granted to its tenant, and that the protection of the Landlord & Tenant Act 1954 is excluded and of no effect.
There are far more statutory regulations that protect residential tenants than commercial tenants, it’s therefore far more important that a commercial tenant is fully aware of its lease terms. Although this article mentions some areas to look out for, more often than not there are differing concerns depending upon the individual property the subject of the letting, or in deed arising out of a tenant’s particular use. If all possible eventualities are not dealt with prior to entering into the commercial tenancy, it may prove to be extremely costly and restrictive thereafter. The best advice that can be given is to speak to a professional who deals with commercial leases prior to committing to any terms.
David Baybut, Partner and head of commercial property
Stephensons Solicitors LLP
Email: dba@stephensons.co.uk