By Avi Barr, pictured above, Partner at Lawrence Stephens
Whether it’s your first commercial lease or you’ve taken one before, leasing a property is a big and often exciting step for a business. However, the process is often not as straightforward as you might expect.
There are a number of issues that can arise that have the potential to impact you financially, and cause anxiety and upheaval for you and your business. It’s important to enter into the process armed with the facts and knowing all your options. Being aware of the potential pitfalls and knowing how to address them should enable you to not only save money, but also speed up the process of signing your lease.
Inevitably, the strength of your bargaining position will affect how much you can negotiate the terms offered to you, but being aware of the major issues will at least ensure you can concentrate in any negotiation on the points which will really matter to your business.
Here are six things to remember that will help you out when taking out a commercial lease:
- It will take longer than you think
Negotiating a lease with a landlord’s solicitor can take a number of weeks. It involves some back and forth between the parties involved, and even a relatively simple lease typically takes around three to four weeks to finalise.
Make sure you allow enough time for the process it takes for solicitors to negotiate a lease, and instruct them well in advance of the date you intend to start the business running at the property. Allow extra time if there are other parties involved, for example, the landlord may be required to seek consent from their bank.
- The property has to work for you
Look into the rights you will be granted in your lease, and whether these reflect your needs. This includes making sure that your budget is adequate for paying all the outgoings, including rent, business rates and utilities, for a start, and making the property fit for purpose. Check that the lease covers all required facilities, such as communal or specifically allocated parking spaces, or the right to use a loading bay.
Before committing to a lease, you should check with the planning authority that the designated use of the building complies with your intended use. You may need to apply for planning permission if the previous use was different from what you want to use it for.
- Exactly how long the lease needs to be
Making sure you’ve got the right length of lease is essential, and one of the most important things to consider. Don’t let yourself be burdened with a long lease you can’t afford! At the same time, if your fitting out or renovation costs are extensive, you will want to ensure the length of the lease is long enough to ensure you gain a return on the outlay.
Consider very carefully if your lease excludes your rights under the 1954 Landlord And Tenant Act – this is very risky as it could prevent you from being able to renew your lease when the current one expires.
- Hidden rent traps
It is important that you understand the rent obligations in your lease. Interest for late payment of rent is fairly standard – make sure you check the interest rate. Delayed payment of rent can give your landlord the right to end your lease early. This is known as ‘forfeiture’ and allows the landlord to change the locks (potentially without even needing to go to court) when rent is unpaid for a period of time – often as short as 7 days!
Longer leases frequently contain rent review provisions. It’s worth being aware of the standard types of rent review and understanding how the review will affect your rent. Common methods for review include Upwards Only Reviews, which will only ever stay the same or increase in line with market rent, and therefore leave a degree of uncertainty, as well as Retail Price Index Reviews, which are linked to inflation, leaving less room for dispute, and Stepped Rent Increases, which will increase by a set amount on certain dates. Each type of review has its own benefits and drawbacks, so do consider which one would work best for your business.
- Repairs: is there something lurking
A standard commercial lease will require you to keep the property fully repaired and in a proper state of decoration. However, this still applies even if you did not receive the property in this condition!
Always inspect the property thoroughly and have a surveyor examine the property before you enter the lease, and raise any concerns with the Landlord before you commit. I regularly see clients avoid having to make costly repairs to a property (with issues such as dry rot and damp) by following advice to have their property adequately surveyed.
When it comes to the end of your lease, you also run the risk of being liable for dilapidations; bringing the property back to the state of repair required by the lease.
If at all possible, have the landlord agree that a professionally prepared schedule of condition is added to the lease. This will show the state of repair at the time you take the lease, and set the expectation of how the property needs to be returned.
- Make sure there’s a happy ending
It might seem counter-intuitive to be thinking about ending your lease before it has even been entered into, but forward thinking is essential for securing a happy ending.
Having a ‘break clause’ in your lease would allow you to bring your lease to an end early. Landlords will normally stipulate a series of conditions that need to be met for a break clause to be exercised, and the law requires that these are followed to the letter, otherwise you will be obliged to continue with the lease. Do check these conditions carefully to ensure they are not going to trip you up when you come to exercise the break. Also, make sure you put any date for having to service notice in the diary. It’s a good idea to let your solicitor know a few months in advance of that notice date if you want to break your lease, as they will be able to advise you on the correct way to deal with the process.
Transferring your lease is something that should also be considered – it’s not as easy as it sounds, and there will almost certainly be restrictions and conditions and a need to obtain the landlord’s consent. Being able share the property with other parties is unlikely to be allowed within your lease unless agreed with the landlord from the outset.
If you’ve done your research and know the potential pitfalls, you should be well prepared to take a lease that works for your business, so you can focus on running your business.
My final piece of advice? Consult a solicitor early – even before you have agreed terms with the landlord, so the process runs as smoothly as possible.