Business leases: tips for landlords
The team at Net Lawman has plenty of experience of negotiating leases, as tenants, landlords and solicitors for both.
The following are some tips for landlords on how to approach obtaining the best terms for your lease.
Put the property into good repair before finding the tenant
There are more than enough reasons why it is beneficial for you to put the property into good condition yourself, rather than let your tenant do it for you. Some of these are:
It is likely to be cheaper for you to do so. Not only are you are likely to seek better value in the materials you use, but you are also likely to make any improvements in a style that suits a greater number of other possible tenants.
If the tenant does it, he is likely to negotiate his costs to be deducted from the rent, and is likely to make improvements that suit him, but not the next tenant.
The property will look better when offered, so will let more easily. It's surprising how a lick of paint can increase demand and rents.
You will start from a sound position, so the tenant will have to maintain the property in better condition.
You will not be in breach of any borrowing covenant.
Improvements may increase the value of your property by more than the cost.
Use a commercial agent for advice
For most transactions, use a commercial agent as an adviser, even if he or she does not show the property. The advice is usually worth far more than the cost, especially in the long term.
Be prepared to show the property yourself
If the rent is low, it won't be worthwhile to pay an agent to trot out to your distant building every five minutes to see prospect after prospect. If you do it yourself on occasion, you'll be able to develop a relationship with your prospective tenants early on, which is not only valuable in later negotiations, but also allows you to find out firsthand what terms an tenant would find attractive.
Start negotiations knowing all your terms
A blank lease template is a great way of making sure you cover all the points during negotiations. It will help you ask your prospective tenants the right questions and avoid tying up the transaction with solicitors for months while you are receiving no rent.
Negotiate the difficult terms yourself and with the tenant directly
It is far better to negotiate the controversial terms yourself than to leave it to your solicitors to bat draft after draft to and fro.
By all means, ask your advisors for support, but don't leave it solely to them.
You know best what's important to you, and your tenant is likely to be far more receptive to concessions if he is dealing with the person with whom he will have a relationship over the coming years.
Furthermore, if your new tenant can tell his solicitor that he knows all about whatever points his solicitor raises, his solicitor will be less inclined to seek out points to score against you.
It's not all about how much rent you can charge
Every landlord hopes he can obtain high rental income from his new property investment. Many forget that rent is simply one of the many terms that can be negotiated and that you might actually prefer to give up some rent in return for other concessions from the tenant.
You should consider the whole deal, not just the rental income. You'll find that the tenant value other parts of the deal differently to you, and you may be able to "win" to far greater extent on something else than you "lose" on rent.
Simplify service provisions
If your property is multi-let or the units have common services of any sort, do make sure all the lease provisions are the same. You will create a nightmare if each tenant is allowed to negotiate different terms. Make sure the total obligations add up to 100% of the total cost. This requires separate consideration of each item of expenditure.
There is value in maintaining a good working relationship
You will find your lease terms accepted more readily if you have considered the tenant’s likely reaction.
If your solicitor thinks he is doing you a favour by producing a draconian draft that uses difficult and intimidating language, put him right. You want good tenants who pay your rent, not a reputation for machismo and an empty building.
Include a rent review clause
Commercial property leases with terms 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.
You could compromise on the initial rent in return for the ability to increase it later by a larger amount. This will be beneficial to your tenant if he is starting up, and could persuade him to let your property rather than another.
Obtain safe guarantors
Always obtain two guarantors for a limited company or one for a new sole trader. Many people operate their business on the basis that if it goes down that is no problem because anything of value is already in the name of wife, husband or mother. The safest guarantors are those most distant from your tenant, so try to avoid spouses and children.
Record all the details immediately after agreement
As soon as you have negotiated a deal, make sure all the points you have agreed go out to the other side in writing. Otherwise you will find that one or other of the solicitors is “re-inventing the wheel”. Using a Net Lawman lease template can be beneficial to do this.
Use a lease drawn by an expert in commercial property
If you want to maximise the value of your property as security for borrowing use a lease drawn by an expert in commercial property (as Net Lawman's document are). Small changes to the words of the lease may make a big difference.
Remember that in all matters relating to commercial property, the only rule is “there are no rules”. Virtually every term of value to you can be negotiated.
You may also want to read our tips for tenants so that you understand what may be important to them.
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.
We would love to hear what you think about this article and how we could improve it. Please do let us know. However, we shan't be able to reply to your specific questions. If you have a question about a document, please contact us.
If you have noticed a bug or a mistake on this page, or just want to give us feedback, we'd love to know. Nothing is too small or too big. Send your message on this feedback page.