Before taking a lease of commercial property, several essential factors must be carefully considered. It is crucial to address these issues at the beginning of the negotiation process with the landlord as it may be difficult to modify them once agreed upon.
Neglecting to give proper consideration to any of these matters may result in leasing a property that does not meet the business’s requirements or subject to an uncommercial and burdensome lease. Typically, after agreeing on the principal terms with the landlord, formal “heads of terms” will be documented, which the solicitors for both parties will use as the foundation for drafting and negotiating the lease.
Here are 10 things to consider before taking a lease:
1. Property use
It is crucial to verify that the property you intend to lease is suitable for your business. Firstly, determine if your intended use complies with planning laws. If not, you should consider the chances of a successful application for change of use.
In the case of taking a lease of a part of a building, it is essential to consider the necessary rights. For instance, you may require access to the roof to install equipment or plants, the right to ask the landlord to grant a wayleave to a telecoms operator, or any other rights over the building.
Furthermore, it is necessary to consider the extent of the property and ensure it includes all the areas and facilities required by your business.
2. Obligation to repair
In modern leases, tenants are often required to maintain the property in good and substantial repair, which can be a more extensive obligation than many people realise. If you lease a property that is in disrepair, you could immediately be in violation of this obligation, meaning you may have to spend money on repairs to meet the requirements. Therefore, we strongly recommend that you have a surveyor assess the property. If you’re concerned about the property’s physical state, you may want to negotiate for a schedule of conditions. This schedule helps to limit your obligation to repair by specifying the standard of repair, usually based on the condition of the property at the time of the lease’s granting.
3. Lease terms
The agreed length of term will be influenced by many factors, including trends in the rental market, the state of the wider economy, the needs of your business and the bargaining power of the parties. Are you looking for short-term occupation or a longer-term commitment? With a longer term you will have greater security of occupation and can justify higher expenditure on your fit out or other works to the property. On the other hand a short-term lease will provide the flexibility to adapt quickly to the needs of your business or changes in the market. The longer the term, the greater the financial commitment and risk. To mitigate this you could negotiate for a break option, which is a right to terminate the lease – either on a fixed date or on a rolling basis – before the end of the contractual term. The exercise of a break option typically requires certain pre-conditions to be met, such as payment of rent. It is important to take legal advice here as landlords often try to impose onerous pre-conditions to make the exercise of the break option as difficult as possible.
4. Security of tenure
The existence of security of tenure is crucial for both the landlord and the tenant. It provides the tenant with a legal right to continue occupying the property at the end of the lease and to obtain a new lease. While the parties are free to determine the terms of the new lease, if they fail to reach an agreement, either party can seek a court ruling on the matter. This ensures that the tenant is protected from the landlord’s imposition of unreasonable terms or arbitrary rent hikes upon renewal. However, the landlord can only defeat these rights if they can prove certain statutory grounds, such as wanting to develop the property or occupy it themselves. By signing a “contracted out” lease, a tenant who agrees to forego security of tenure will lose these valuable rights. As a result, they will either have to vacate the property at the end of the term or negotiate a renewal with the landlord without the aforementioned safeguards.
5. Changes made to the property
Typically, landlords desire a significant degree of authority over any changes made to their property. A commonly adopted stance in the market is to prohibit all structural and external alterations, while allowing internal non-structural modifications subject to the landlord’s consent (which should not be unreasonably withheld). Certain types of changes, such as the installation of demountable partitioning, may not require the landlord’s approval. When contemplating alterations, it is important to determine which categories of works will be permitted and if they are adequate. Will the landlord require a formal licence for each alteration, which will likely incur costs and cause delays? Additionally, will the tenant be expected to remove the modifications upon the lease’s expiration? It is advisable to assess the necessary fit-out works in advance and to obtain the landlord’s approval as soon as possible.
6. Assignment/subletting
In today’s economic environment, it’s crucial to be adaptable. Ideally, you would have complete freedom to manage your property as you see fit, but that’s often not feasible in commercial lease agreements, where landlords require a certain level of control. At the very least, you’ll want the right to transfer or sublet the property (and potentially subdivide it if that’s possible), but these actions will usually require the landlord’s approval and come with certain conditions. One common condition is requiring the outgoing tenant to guarantee the new tenant’s obligations when assigning the lease. This means that even after you’ve relinquished all interest in the lease, you could still be held liable for rent payments. If you plan to share the property with franchisees or concessionaires, ensure that the lease permits this. Keep in mind that in shorter lease agreements, subletting and assignment may be completely prohibited.
7. Rent
In the past, rent payments were typically made quarterly in advance, but it’s now becoming more common for landlords to allow monthly payments, particularly for shorter lease agreements. Landlords may also request a rent deposit if they’re unsure whether the tenant will be able to meet their lease obligations. This deposit is usually equal to three or six months’ worth of rent and serves as security for the landlord in case of non-payment or breaches of the lease’s terms.
For longer lease agreements, there may be provisions for adjusting the rent to reflect inflation or changes in the property’s value over time. This can be established from the beginning using a “stepped rent” structure, or through rent review provisions that use either an open market valuation or an inflation index, such as the RPI, at specific intervals. However, it’s important to note that in either scenario, the rent is typically only allowed to increase and not decrease after a review.
8. Incentives
Landlords may provide different incentives to entice potential tenants depending on the market conditions. These may consist of:
- Free or discounted rent periods, which typically correspond to the duration required for the fit-out works. During this time, the tenant will not be generating any revenue from the property.
- Financial support towards any renovations that the tenant plans to undertake, especially if the property is in poor condition or if significant upgrades are necessary.
- Reduced-price services that are accessible in the building, such as discounted cafeteria meals or parking spots for workers.
9. Other expenses
If the annual rent is not truly comprehensive, then there will be other property-related expenses to consider. These may comprise:
- Business rates
- Utilities
- Building insurance, or more commonly, a percentage of the landlord’s insurance expenses for the property, which would typically include a provision for loss of rent for a specified period (usually two or three years).
A service charge, if the property is part of a managed building or estate, to cover the landlord’s expenses for providing services.
- Since each property is unique, it’s essential to determine what additional payments will be imposed before committing to the lease and allocate funds for these expenses. If you’re concerned about service charge expenses, you could request a cap or even an all-inclusive rent.
10. SDLT (Stamp Duty Land Tax)
When a lease is granted, Stamp Duty Land Tax (SDLT) may be required to be paid. The tax amount is computed based on the “chargeable consideration” paid for the lease, which typically includes the rent, any premium, and other expenses such as debt repayment. Although online calculators are available, they may not be suitable for complex transactions. Depending on the transaction’s nature, the property and parties involved, there may be reliefs or exemptions available. The deadline for filing a return varies depending on whether the transaction is only “notifiable” without tax liability or if tax is payable. If tax is payable, it must be paid within 14 days after the lease’s completion. Failing to file a return or pay taxes on time may result in penalties and interest. Due to these reasons, we suggest seeking professional advice.
Disclaimer:
The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Connaught Law and authors accept no responsibility for loss that may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Connaught Law. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Connaught Law.
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