Commercial Lease Basics
The very same commercial lease can be both a godsend or a noose depending on the terms struck between the parties at the outset. Will it provide a good foundation with which to give the business the opportunity to prosper or will it be a drain on profit with expenditure taking away any likelihood of possible returns? Either way, a commercial lease will likely be one of the main commitments of the business and should not be entered into lightly.
Solicitors prepare and negotiate commercial leases based on principles set out in heads of terms pre-agreed by the parties and typically prepared by an agent. Therefore, it is useful for potential tenants to seek initial advice before agreeing such principles to ensure they are not “hamstrung” during negotiations at a later date. Frequently I am instructed only once heads of terms have been agreed which may prove undesirable if subsequent advice highlights any misgivings that may make any backpedalling difficult.
Potential tenants should therefore consider the following:
Term: Landlords will typically push for a longer term unless they have plans for the property in the future whereas a new business may want a shorter term for flexibility. Whether a short term or a long term lease is appropriate will be influenced by your business needs and whether the lease being granted benefits from a break clause or security of tenure (see below).
Rent: Do you require fit out works before the business can trade at the property? If so, consider requesting a rent free period as an incentive which is usually offered on shell properties.
VAT: Has the landlord opted to tax the property? If so, VAT will be payable on the rent and likely to be required for any rent deposit. VAT will also be included in the calculation for determining what fee is payable to register the lease (if required) and the amount of stamp duty land tax payable (if any). If you are not registered for VAT, you will be charged input tax with no way of recovering this. For some businesses, this could be the difference between an affordable lease or not.
Repair: To the extent that the property is not in the state of repair and condition required by the lease, you will be responsible for any shortfall regardless of how the property was when it came into your hands. To minimise the potential exposure, you could agree that a schedule of condition will be prepared to evidence the state of the property from the outset and appended to the lease so that you do not have to put it in any better state. A schedule of condition can be as simple as taking some photos of the property or requisitioning a full surveyor’s report.
Break clause: If the lease is for a long term, you may want to consider a break clause for flexibility. This would allow you to break the lease subject to certain conditions, which should be limited to payment of the principal rent and giving vacant possession.
Security of Tenure: This relates to whether or not the lease is afforded protection by law. If so, you would have the right to oblige the landlord at the end of the term to renew the lease on similar terms save at market rent, subject to limited exceptions whereby compensation will be payable if the lease is not renewed. If the lease is not protected, you can still negotiate a renewal with the landlord but there is no obligation on the landlord to do so or that the new lease will be on similar terms. Protected leases are therefore more valuable and usually command a higher rent and more onerous obligations.
Security: The landlord may ask for security in the form of a rent deposit or a guarantee. To the extent that you can prove your financial viability you could attempt to resist demands for security. This could be by producing company accounts (where the tenant is a company) which show adequate profits.
Please contact Sing Li on 01582 514 356 or by email on [email protected] if you would like to discuss the matters raised in this article or any other aspect of commercial law.