Business leases: negotiating tips for tenants
After salaries, rent of your business premises is likely to be the largest 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.
The following are some tips for tenants on how to approach negotiating the best terms for your lease.
Prioritise your requirements before you start looking
Write down all the features you need in your new premises and put them in order of importance.
For each property you visit, check the building's features against your list of requirements, and assess the cost or disadvantage that not having one of your requirements presents.
Features that aren't requirements are beneficial only if they don't increase the cost overall.
Find out the flexibility of terms before negotiations
One of your questions to the agent at the outset should 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. Three common reasons for inflexibility are as follows.
If you take a lease of part of a building or a building on an estate, such as a shop in a parade or an office block on a business estate, 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 security. It is unlikely that you will be able to negotiate any change on terms of this type.
Additionally, some landlords run a multi-let building or estate of units on the basis of a "standard" business lease. Usually, this is because the landlord has made special arrangements with a lender to maintain the lender's security by insisting that all units are let on terms beneficial to the lender if the landlord becomes insolvent. Such a lease is often referred to as of "institutional quality" although a cynic might say it is the opposite of "tenant quality". In these cases, a landlord will not have the power to negotiate even if he would like to do so.
If the commercial agent trying to sell you the lease also "manages" the rent collection and repairs and maintenance, he may have a strong interest in the entire lease obligations being the same, since his job of managing would be more complicated if every tenant had different obligations and rights.
Negotiate the terms of your lease around your requirements and not the "added extras"
Treat every feature that isn't a requirement as a disadvantage.
Landlords and agents will use the features that aren't on your list of requirements to argue for terms in their favour (notably higher rent). A swimming pool in the basement, an art-deco entrance or being set in a vast estate might actually swing your decision to take the premises, but you should make sure that "unique features" aren't used as bargaining chips in negotiations.
If the other side does bring their advantages up, you should point out the disadvantages: a swimming pool requires specialist maintenance and heating, the art-deco entrance may push up insurance costs, and being set in an estate might make it difficult for your employees to reach work.
Use a draft lease agreement during negotiations to ensure you cover all the details
Commercial agents will usually entice you into a deal by telling you only a few of the most obvious terms proposed. You won't learn about the disadvantageous provisions until a draft copy of the lease is with your solicitor. The commercial agent would hope that by then you are so psychologically and practically committed to the property, you will sign the agreement regardless.
You can avoid this trap by making sure your negotiations with the agent or landlord cover all of the terms. You can use a draft business lease agreement from our collection as a model version and effectively complete it with them as you discuss the terms. If the agent or landlord doesn't know the answer to a question, ask them to find out quickly. Since you are not paying them, it is far more cost effective to have them do the work than have your solicitor do it, especially if you later withdraw from the deal.
Keep the term of the lease as short as convenient
Set the term of the lease yourself and don't be tied to a long term. "A short term lease" is not a defined term. The phrase could be used to mean less than 7 years (the point at which the lease has to be registered by the landlord at the Land Registry), or it could mean between 3 and 5 years, or for an even shorter time. A landlord who likes the thought of your becoming a tenant will offer a longer term because it gives him greater certainty over future income and can increase the value of his property. However, you don't have to accept his first proposal. If you don't want to be tied then you should negotiate a short term. Start with the deal that you would like, not the one that is presented to you.
Beware of very short terms
On the subject of short leases, beware landlords offering terms of a year or 18 months. Given the costs of letting, it isn't in their normal interests to offer less than 3 years. If they do, ask why, and seek additional security.
Go into negotiations with several alternative properties
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.
Of course, 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.
Delay how often rent can be reviewed and set ceilings on increases
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.
If the market in the sort of property you want is poor for the landlord at the time you are searching (i.e. you as the tenant have plenty of choice), 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.
Use an experienced commercial valuer at a fixed price
A commercial valuer (surveyor) can help you with: rental valuation; negotiating the terms you really want; advising you as to what is or is not possible; and preparing a schedule of dilapidations. Decide where you need the help and negotiate a fixed price with the surveyor for the rest. Be sure to give precise instructions and bear in mind that your surveyor may be reluctant to get involved in the detail that would usually be left to solicitors.
Finally, remember that in all matters relating to commercial property, the only rule is "there are no rules". Virtually every term of value to you as a tenant can be negotiated.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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