As we head further into unchartered waters we have all been forced to look at how we live and work.
We are being advised to work from home if we can, making many commercial properties too vast or even, in some cases, no longer required.
These are not temporary measures for some companies, for some they have simply found it a more efficient or cost effective way of working and therefore just will not need the space that their commercial property has.
Of course there is the sad realisation of many companies looking to sell or downsize, due to the level of staff that they have had to make redundant during this time.
Selling and buying, or even leasing a commercial property, can be a lengthy and complicated matter. One area which people often find particularly daunting is taking on a new lease of commercial property.
We have put together a list of our top 7 tips (which will continue into the next edition) to help you negotiate the right deal with the Landlord or the Landlord’s agents at the outset as changing the terms later on can be more difficult:-
For many tenants this is the most important thing. How much money you end up paying to use the property.
Many Landlords will be prepared to negotiate an attractive starting “rent”, but it is also always worth trying to agree an initial rent free period of say 3-6 months at the start of the Lease to help offset any initial fitting out costs.
Be wary of rent review provisions as the starting rent often only covers the first few years before there is an open market rent review and possibly a large rent hike. One way of avoiding this, particularly on shorter term leases, is to agree staggered rent increases of fixed amounts so you know exactly where you stand throughout the whole period of the Lease.
Next, consider the frequency of rental payments. Very often you will be asked to pay 3 months in advance (known as quarterly payments) and it can therefore help with your cash flow to try to negotiate monthly payments instead.
Finally, bear in mind that most commercial properties charge VAT on the rents which will add 20% to your bill if you are not registered for VAT to enable you to reclaim it.
Please bear in mind that it is not just the rent that you will be liable to pay. There may in addition be payments for insurance and service charges for common areas or repairs to the building.
Try to get a reliable estimate of the amount which you will be asked to pay for these, based on the level of charges in the past, and check the percentage attributed to the premises.
This should give you a fair idea of the likely liability, but there is never any guarantee of this, so if you want more certainty see if the Landlord is prepared to agree a cap on the overall amount.
Length of Lease
This is often called the “Term”. Of course, this may depend on how long you expect to want to use the premises, but it is generally not advisable to go for too long a Lease, as this can increase the costs involved.
For example, if your term is less than 7 years, you can often avoid certain legal requirements to have to complete a stamp duty land tax return, or to register the lease at the Land Registry and avoid the fees involved with these.
The starting point with commercial leases is that the tenant has business security of tenure under the 1954 Landlord and Tenant Act. This means, for example, if you go for a 5 year lease you generally have a right at the end of that period for the Landlord to give you a new lease.
Many Landlords routinely try to exclude this legal right by agreement, which
puts them in a stronger position when it comes to renewal time. We advise that you avoid agreeing to exclude this important right except in the very shortest, temporary lettings.
Next, try to achieve flexibility by getting a tenant’s break clause agreed. This is a provision that allows you to get out of a lease early, usually at specified intervals, although it usually requires up to six month’s notice, or three month’s notice with a break payment.
Sometimes the landlord will ask for a rent penalty to be paid as well, but it is better not to agree to pay this unless the landlord agrees to shorten the period for giving notice. The lease may contain provisions which allow you to transfer it (called assignment) with the landlord’s consent which is generally not to be unreasonably withheld. While this is an important right, it is often better to use a break clause to terminate the lease because of the usual conditions for an assignment is that you give, what is called an authorised guarantee agreement for the person taking over the lease. In other words if they don’t pay the rent the landlord can come after you for it.
This is perhaps the biggest area of dispute both during lease and also when it ends. Sometimes the tenants find themselves landed with a massive repair bill (known as dilapidations) at the end of a relatively short lease for matters which they did not realise were their liability. Generally, if you take on a full repairing lease, at the end of it you will be liable for all repairs that are necessary, even if they were needed when you took on the lease. One way of avoiding this is to limit the repairing obligation to the existing condition of the property so that you do not have to leave it in any better condition at the end of the lease. It is advisable for this to be supported by a photographic schedule of condition as evidence to try to avoid disputes. Where you are taking a lease of part of a larger building it is also important to consider the condition of the whole building where a part of this may be charged back to you under the service charge.
Most leases restrict alterations to the property without the landlords consent. Often to get that consent a formal document known as a license is necessary, which may involve you paying substantial landlord legal fees for preparing it. If you know at the outset what alterations you will need to make to the property it is advisable to negotiate this as part of the initial lease, so that you know for certain that the landlord has agreed, and to avoid additional license costs.
Use of the property
The lease will generally specify what the property can be used for and you need to make sure that this covers exactly what you are proposing for your business. If possible, try to get this agreed for general planning use classes, for example use as a retail shop without specifying the exact nature of the business. You also need to consider the authorised planning use and establish exactly what this is. If a change of use application is going to be required you do not want to commit to the lease until you are sure that this will be granted on satisfactory terms.
You may sometimes be asked to pay the landlords costs in connection with the transaction. Never agree to this if it can be avoided and insist that each party must pay their own costs. Otherwise, if there is an argument about the provisions of the lease before it is completed you will be giving the landlord an open invitation to be unreasonable at your expense. If this can’t be avoided then try to ensure that you limit any payment to a fixed contribution towards those costs.
We are offering remote video meetings, as well as electronic forms. Contact Beacon Wealth Legal for business legal advice.