9 things to remember negotiating a commercial lease

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Pannikos Euripides presents his checklist for taking on a new lease

Acquiring a commercial property lease is both an exciting and nerve-racking time. You have a great idea, the business plan is written, and you just want to get going. But, before you get carried away, due consideration should be given to all the associated costs with taking on a new lease. Fail to do this and you will find a gaping hole in your finances that could easily render your business unviable.

Let’s consider the main associated costs with taking on a new commercial lease:

Rent

This is the most obvious expense and one that pretty much most people factor in. That said, the following should also be considered:

  • When will the rent first become payable? i.e. can you negotiate a rent-free period, while you are “fitting out” or perhaps a stepped rent scenario?
  • What frequency will the rent be paid? Most leases require that the rent be paid quarterly in advance on the traditional English quarter days (March 25, June 24, September 29 and December 25). You therefore need to find three months’ rent in advance, unless you can negotiate monthly rents, which is a “no brainer” but you have to ask for in order to receive.

Deposit/security

Especially true of start-ups and businesses with little track record and financial assets, a landlord will want one or more forms of security. This could be a personal guarantee, cross company guarantee and/or a rent deposit. Rent deposits tend to be in the region of three to six months depending on the businesses risk profile and the landlord’s history with other tenants, though it is not uncommon for a landlord to ask for a whole year.

VAT – can you reclaim it?

Often overlooked is the issue of VAT. If a building has been elected by the landlord for VAT, then he must charge VAT on the rents that he collects. Fail to take this account and you are looking at an extra 20 per cent on your rent costs that you were not expecting. In addition, bear in mind that there will also be VAT applicable to the rent deposit held by the landlord.

Business rates

Every property is subject to paying business rates. This is the business equivalent to what you personally pay as council tax. Each commercial property has what’s called a rateable value (RV) which is an estimate of what the open market rent would have been at a historic date. The RV is then multiplied by the Uniform Business Rate (UBR) to establish the actual rates payable for that particular property. As a general rule of thumb, the rates payable per annum is typically around half the RV of the property. You can view the RV of the property you are considering by checking the Valuation Office Agency (VOA) website.

If this is your only business premises, some properties may be exempt from paying business rates if the RV is below a certain level. In addition, if the entity taking the lease is a registered charity, you may also be eligible for a substantial discount on the rates payable.

Service charge

Unless the space you occupy is a standalone building with no other tenants/occupants – for example a ground-floor lock up shop with nothing above it – you will need to pay a regular or ad-hoc service charge to the landlord or their managing agent. This will be a proportionate payment towards the upkeep of the building fabric and structure plus any other parts that are used in common with others, such as private roadways, paths and CCTV cameras. Depending on the age and specification of the building, this can be a considerable expense and it is always worth scrutinising historic service charges for the building to pre-empt any immediate future expenditure, such as replacement of a roof or lifts, of which you will be responsible to pay a proportion.

Buildings insurance

The landlord will almost always take out the buildings insurance policy for the property as it is in their interest to ensure that the physical asset is protected. They will however pass this cost on to the tenant either directly or via the service charge.

Professional fees

You can sign and take a new lease with little or no spend on professional fees, but this is not a sensible way to go. Commercial leases are complex and while many of the terms might look straightforward, the implications and nuances around them can result in some very expensive mistakes further down the line.

With this in mind, the following key people should be considered as part of the lease acquisition process:

  • Commercial lease surveyor/negotiator – Key to helping negotiate the right deal, agree and flesh out the heads of terms and generally baby sit the transaction until successful conclusion.
  • Commercial lease solicitor – Key to dotting the i’s and crossing the t’s and liaising with the leasing surveyor to ensure a speedy and smooth transaction.
  • Building surveyor – If the property is in poor repair or there are concerns such as damp or structural defects. They can also put together a “schedule of condition” to help limit future exposure to repair issues and reinstatement at the end of the lease.
  • Planning consultant – Critical if you are required to obtain a change of use for your intended use of the property.

In addition, you may also be required to contribute towards or cover in full the landlord’s professional fees, being solicitors and potentially his surveyor’s fees.

Capital spend/fit-out costs

Depending on the nature of the business and property in question, you could be looking at a substantial cost for fitting out. If a simple office space, this could be just a few thousand pounds, compared to say a leisure or restaurant property where you could easily be looking at six figures plus. If initial capital expenditure will be high, always consider having a decent lease length in order to help amortise the costs over a period of time.

Utilities

These are typically gas, electricity and water. These may or may not already be set up and so there may be additional costs in setting these up with the relevant suppliers and ensuring that they are of sufficient capacity for your requirements. Also bear in mind that there can be significant lead times in setting up even the most seemingly simple of supplies, such as broadband.

It is advisable to draw up a spreadsheet of all the potential associated lease costs and use this to crunch the numbers when looking at potential properties.

Panikkos Euripides is managing director of Windsor Grange, a London based commercial property consultancy advising start-ups and SMEs