Business Lease Tips
Introduction
You can work from home only for so long. Sooner or later you need premises for your business - or even larger premises. After salaries, the cost of your business lease is likely to be the biggest overhead you have. Because a business lease invariably involves a commitment for a substantial period of time, it is very important to get the right premises on the right terms.
Here are some hints from an experienced property professional:
- Write down all the features you need in your new premises. Put them in order of importance. Check every property you visit against your list, and make sure you account for any additional cost or disadvantage which each may present;
- Short leases are often called tenancy agreements, but the effect is the same. You can fix your deal for any period you like. If your landlord likes the thought of your becoming a tenant he will ask for a long term lease. If you do not wish to be tied then you will negotiate a short term. Start with the deal that you would like, not the one that is presented to you;
- Commercial tenants have far less protection than residential tenants. Most commercial landlords are either professional landlords or use professional agents, or both. They are experts in every aspect of commercial property. Most commercial agents are also experts at negotiating lease terms on behalf of their clients;
- The main effect of the comparatively free market in commercial property is that “everything is up for grabs” . If the agent or landlord thinks you are likely to take the property on offer it is unlikely that they will move on the terms. If you make it clear that you have several alternatives, then you will find that the previously “fixed” terms suddenly become very flexible. Much depends too upon the state of the market. A landlord may well be tempted to hold out for his set price and terms if he thinks someone else will come along soon and accept them;
- If the market in the sort of property you want is poor at the time you are searching, then you should make sure that there is some sort of a ceiling on the new rent when it is reviewed. You do not want to find you are paying three times as much in three years time;
- Leases for a period of seven years or longer are governed by a new set of rules which had effect from 19th June 2006. Very briefly, the lease must be registered at the Land Registry Office and additionally, you must set out certain terms of the agreement at the top of the document. These terms are called ‘prescribed lease clauses’. Net Lawman has provided articles on registering such leases in separate articles. Here is part one and part two;
- Leases for longer than three years generally incorporate a provision for the rent to be “reviewed” every three, four, or five years. The review is usually “upwards only” . Infrequent reviews obviously lead to your total payment being less over the term of the lease;
- Commercial agents will usually entice you into a deal by telling you only a few of the most obvious terms proposed. Once you have agreed to take the property, your solicitor will receive a draft lease document which gives all of the bad news. By now you are psychologically and practically committed to the property, and you find your solicitor an irritation. Because you think the deal has been done, you think “the legal” are a formality. You will sign anything. You may now sign to terms which are greatly disadvantageous and which could be very expensive at some stage.
You can avoid this trap by making sure your deal with the agent or landlord covers all of the terms which will affect you. If they do not know the answers, ask them to find out and tell you quickly. Make sure you get a copy in writing. You are not paying them! It is far cheaper than paying your solicitor to negotiate. This also saves wasting solicitor's fees if you later decide to withdraw from the deal. You can use the Net Lawman lease document as a model version. The commentary will help you set up your shortlist and tell you what to expect:
- If you take a lease of part of a building, such as a shop in a parade, you will find that some of the terms in the lease may be included for equality and fairness among the tenants. An example might be the division of cost among the tenants for repairs to the roof. It is unlikely that you will be able to negotiate any change on terms of this type. You need to consider in advance what they are before you waste time negotiating inflexible terms;
- Some landlords run a multi-let building or estate of units on the basis of a “standard” business lease, because they have made special arrangements with a lender to maintain the lender's security by insisting that all units are let on terms which ultimately benefit the lender if the landlord becomes insolvent. Such a lease is often referred to as of “institutional quality”. A cynic might say it is the opposite of “tenant quality” . A further reason for inflexibility is that the commercial agent now trying to sell you the lease, also “manages” the rent collection and repairs and maintenance;
- They therefore have a strong interest in the entire lease obligations being the same, since their job of managing would be more complicated if every tenant had different obligations and rights. One of your questions to the agent at the outset should therefore be as to the flexibility of the lease. If there is no flexibility then you may decide to vote with your feet and look elsewhere.
Whether you are looking at new built space or not, always use an experienced commercial valuer. He / she will help with:
- Rental valuation;
- Negotiating the terms you really want;
- Advising you as to what is or is not possible;
- Preparing a schedule of dilapidations.
Instruct your surveyor precisely, having negotiated a fixed price. Decide where you want the help and pay only for those services. Your surveyor too may be reluctant to get involved in the detail he would usually leave to solicitors.
Finally, remember that in all matters relating to commercial property, the only rule is “there are no rules”.
Security of tenure
If the lease is governed by the Landlord and Tenant Act 1954, and most leases are, the tenant has a right to security of tenure. This simply means that they have a right to continue using the property and renew the tenancy on the same terms so long as neither of the parties objects.
Under the new Regulatory Reform Order 2003, a landlord can only refuse to continue the tenancy if the tenant has done one of a few things (see our article on Security of Tenure for full details). One example might be that the tenant failed to make regular payments.
If the landlord is happy for the tenant to continue in occupation under the terms of the original lease, he should serve a ‘section 25’ notice to that effect.
