Committing to a commercial lease is likely to be one of the largest financial overheads of any business. As such it is imperative that the premises, and the terms under which it is occupied, are carefully considered before signing the lease.
The tenant must fully understand the heads of terms (also referred to as heads of agreement), which form the basis of the understanding between the landlord and tenant before the lease itself is drafted. Consequently, it is advisable to seek assistance from a property lawyer at the outset as heads of terms can often prove difficult to renegotiate.
Key areas to consider carefully within the heads of terms are:
The flexibility of a shorter lease should be considered against the potential costs of relocating after a short period of time (incurring the usual tax, logistical and professional costs).
Remember that goodwill within a business is often strengthened by being a constant within the commercial community. However, a longer lease may trigger Stamp Duty Land Tax liabilities and incur additional costs of registering the leasehold interest at HM Land Registry also.
Additionally, a commercial tenant should look to understand their rights under the security of tenure provisions within the Landlord and Tenant Act 1954. Express exclusion of these rights is commonplace in commercial leases, thus removing the tenant’s general statutory right to renew the lease on the same or similar terms at the end of the initial period.
Commercial tenants should be wary of the potential financial liabilities under the lease spiralling; hence the importance for clarity in the heads of terms.
In addition to agreeing an annual rent, a tenant should confirm: whether VAT is chargeable on the rent and other outgoings; the cost of any insurance obligations; annual service charges; estimated utility costs and business rates.
The basis upon which the rent is subsequently reviewed during the term can often be contained within fairly complex clauses within the lease. It is important to understand whether the landlord intends to review rent based on a percentage above inflation, in line with open market conditions or perhaps relative to the turnover of the tenant.
In short, alienation is reference to the tenant’s ability to assign, sub-let or charge the lease during the term. This will vary from property to property and the landlord may, for example, consent only on the condition of securing a suitable rent deposit or guarantor for the assignee.
Often the basis of litigation between landlords and tenants, a break clause may allow one or both parties to end the lease early subject to specific conditions.
Ensure that the break clause provisions are not excessively onerous and are limited to, for example, the tenant paying rent and giving vacant possession on the break date only.
Take care to note your insurance obligations under the lease. Under a lease of part of a building you would expect the tenant to be recharged a proportionate cost of the landlord’s annual insurance premium. Under the lease of a whole building, you will more likely find that the tenant has full repair and insuring costs.
Within a shorter lease of less than 3 years, a tenant should be able to resist responsibility for repair. Under a longer lease a tenant would expect to be liable for repairs and periodic decoration – it is therefore vital to understand the full extent of your demise and whether it includes structural elements also.
It may be wise to have a survey of the property carried out, noting in particular the condition of the roof.
It may advisable to enter into a lease as a limited company as taking the lease on in your sole name will make you personally liable for performance of the tenant’s covenants – this could put your own personal assets at risks.
However, if you are a new company you will likely be asked to personally guarantee the provisions of the lease in any event. Attempt to remove this obligation by offering a rent deposit instead.
In conclusion, understanding the above key terms will assist in your search for your next commercial property. However, it is advisable to seek legal assistance from the outset to ensure that the heads of terms can be negotiated more appropriately in your favour in advance of the landlord’s solicitor preparing the lease.
For further information on commercial property issues, please contact our Company & Commercial Department.
(First published December 2014, updated January 2016)