Once you develop a business strategy and decide which type of commercial property suits your needs there are a number of points to consider next and these might include the following:
Location. Ensure the location of the premises is appropriate for the type of services you are going to provide. Make your research on the local area, potential competitors, level of footfall, transport links, accessibility, etc. Also, parking facilities, restrictions on loading and unloading is something worth keeping in mind.
Business Rates. Contact the Local Authority to confirm the current rates and see whether an exemption might apply. For more information on business rates visit: https://www.gov.uk/introduction-to-business-rates
Premium. It is very common that on the granting of a lease/sub-lease, the tenant is asked to pay a lump sum upfront. The amount will usually depend on the number of years remaining, the difference between actual and market value rents, the location of the premises, fixtures and fittings, goodwill, etc. An element of flexibility is always there and you need to make sure the premium is reasonable.
Minimum Energy Performance Standards. From 1st April 2018, it will be unlawful for landlords to grant a new lease to new or existing tenants of properties that have an energy performance certificate rating below E (unless an exemption applies).
Planning permission. If it is within your plans to change the use of the premises, make sure you have a planning permission you need. Please note, however, that in certain cases, such as when the existing and the proposed uses fall within the same 'use class', the planning permission is not required. It is always better to seek advice directly from the local planning authority on the planning permission matters. For more information and useful guidance please visit the Planning Portal website.
Lease Agreement. If you are going to rent commercial property for more than three years in the majority of cases there will be a commercial lease agreement between you and the landlord. Commercial lease agreements have become more widespread in recent years. By creating a landlord/tenant relationship, the tenant acquires an interest in the property as opposed to certain rights which are exercisable over the property when a licence is signed.
Negotiating the terms of a lease. When a new lease is offered there is always room for negotiation. Some of the terms you might take a particular note of are as follows:
- The lease length – typically between three and twenty-five years depending on your needs. Try to avoid being locked into a lease for longer than it might be necessary.
- Break clauses - check whether you are able to leave before the lease ends and whether any conditions should be satisfied before a break clause can be exercised. The break clause applies both to the tenant and landlord.
- Rent – is usually payable in advance on or before the rent payment dates. Check whether VAT is payable on top as it might not be clear. Depending on the circumstances try to negotiate the rent-free period.
- Deposit – depending on the size of the property and liabilities under the lease, you might be asked to pay a deposit to the landlord and sign a Rent Deposit Deed. Such monies will be held as a protection against any tenant’s or guarantor’s failures under the lease. Make sure the deposit is held in a separate account and you are entitled to all interest earned.
- Rent reviews– try and negotiate for longer rent review periods and stipulate that rent reviews should be both upwards and downwards. An upwards only rent review means that you will not benefit from any decrease in market rent levels.
- Guarantee – if you, as a tenant, are not in a decent financial position or your company has little trading history, the landlord might ask for a guarantor as a form of security for your compliance with the lease obligations. It could be either a third party guarantee or, which is less common, a bank guarantee.
- Service charges– check the proposed lease in order to see what can and cannot be levied by the landlord by way of service charges. Service charges usually apply to the property that is part of a building or estate and where the landlord provides services for the benefit of the tenants (e.g. repair and maintenance of common parts, provision of security staff, etc.). The tenant will usually pay a proportion of the total expenditure to the landlord. Try to remove from the service charges any items the landlord or other tenant(s) should be responsible for.
- Insurance – if the landlord provides the building insurance, the landlord will seek to recover the costs from the tenants (e.g. via the service charges). Therefore, even though it might be difficult to achieve, try to limit such costs to those that are reasonable and proper. Also, make sure that all the necessary risks are included in the list of ‘insured risks’ because any ‘uninsured risks’ will eventually have to be covered by the tenant and that damage caused by insured risks is excluded from the tenant’s repair covenant. A different type of insurance which is a contents insurance is something that is arranged directly by the tenant.
- Assignment- if the lease allows the tenant is able to assign the whole of the property with the prior consent of the landlord. Make sure you are aware of any conditions that may apply to you. For example, tenant’s liability to make good any breaches committed by the assignee.
- Subletting– try to include the clause that will allow you to sublet the space you might not need by granting a sublease to a third party and hence to obtain income from the property. Such underlease or sublease falls below the lease between the tenant and landlord and therefore it is important that the terms of the overall lease are observed. The right to sublet can be useful when assignment is not permitted.
- Alterations – make sure the lease allows you to make changes, carry out works and alterations that are necessary to make the premises fit for the intended use and meet specific needs. The general rule is that the landlord’s consent to alter should not be unreasonably withheld.
- Repairing and decorating obligations – a standard rule is that the tenant maintains the interior while the landlord looks after the exterior and structural repairs. However, check the definition of the Property in the lease to see the extent of your repairing obligations. Be aware of the ‘full repairing and insuring’ lease according to which all repairs and insurance are borne by the tenant. Familiarise yourself with all the dilapidation clauses in the lease and budget for future obligations in advance. It might be worth arranging a Schedule of Condition in order to limit the extent of your repair liabilities.
- Landlord and Tenant Act 1954– check whether you are entitled to renew the lease once it expires. If the lease constitutes the ‘contracted-out tenancy’ (known as the lease ‘outside the act’), from the very outset the landlord must serve an appropriate notice and the tenant has to sign a statutory declaration to acknowledge that the lease does not grant an automatic statutory right to renew. However, even if the lease has “security of tenure”, the landlord might still refuse to renew the lease but only on very strict grounds prescribed by the Act (e.g. persistently delayed rent payments, etc.).
Land Registration. All leases for a term of more than seven years must be registered. Your appointed solicitor might be able to help you with this.
This page contains guidance information only which does not constitute, and should not be relied upon, as legal advice. Please contact a suitably qualified lawyer on any law related matter.