Whether you are taking on a commercial lease for the first time or are an experienced tenant, it is always worth considering a few essential points before embarking on a new lease.
Often, when we are approached by clients who are looking to enter into a lease, the main commercial terms have already been agreed between the tenant and the landlord which makes it difficult to negotiate changes we might want to suggest to protect/help the tenant once the deal has been “set in stone” as the Heads of Terms.
With that in mind, we have put together a list of 5 things every tenant should think about when considering entering into a lease.
1 Be Wary of Accepting an “FRI” Obligation
Most landlords will want a tenant to take on what is known as a “full repairing obligation”. This can often require a tenant to put the property into a condition that is considerably better than it was when the tenant originally took possession. The financial consequences of this usually come home to roost at the end of the lease and can be particularly costly for small businesses and sole traders.
Try to resist a full repairing and insuring lease especially if your lease is for five years or less. One way of doing this is to ask that a schedule of condition is agreed and attached to the lease. A schedule of condition is a photographic (and sometimes written) record of the property at the beginning of the lease that acts as a benchmark for the condition of the property. If worded correctly a schedule of condition carve out ensures that the tenant doesn’t have to put the property into any better condition than as shown in the schedule when the lease comes to an end. Reaching agreement with the landlord on this important issue early on in your discussions is key.
2 Rent Free Periods
Most tenants will have a period of time where they need to fit-out the property they are leasing so that they can begin running their business. A fit out can take place over a few days, weeks or months depending on the nature of the fit-out works and the property. During this time a tenant will not be trading so a landlord will sometimes agree to grant the tenant a rent free period during which the tenant does not have to pay rent.
A rent free period varies in length depending on the length of the lease and can often depend on the bargaining power of both sides. It is worth asking for a rent free period early on in the lease discussions before the legal drafting stage is reached.
3 Break Options
A break option allows a tenant to end their lease early by giving notice to the landlord. It gives the tenant flexibility which is particularly beneficial where a tenant is starting a new business or considering other options for the future. A landlord won’t offer one in the negotiations so consider if this is something you/your business will require.
4 Be Aware of All the Costs
A lot of tenants assume that the main cost in connection with their lease is the rent. However, there are a number of other costs that a tenant may be responsible for in addition to the rent which you should check before committing to a new lease, for example:
- Insurance;
- Charges for maintaining common areas or service charge;
- Utilities;
- Non-Domestic Rates;
- VAT – a lease will always state that a tenant is responsible for VAT on the rent and any other sums paid by the tenant to the landlord. Not all commercial property rents are subject to VAT (but in practice the majority are) so you need to ask if this applies to the property you are interested in.
One cost you should resist agreeing to pay is the landlord’s legal costs for drafting the lease. In the current market our advice is that the only legal fees you should be paying in a new lease are your own.
5 Remember Other Consents May Be Required
Check whether the property you are interested in has the correct Use Class for the type of business you want to operate. Planning law dictates that in order for a property to be used for a particular purpose then it must fall within a certain Use Class. For example, shops are usually Class 1, offices Class 2 and restaurants Class 3. If a property does not have the correct Use Class for your business then an application will need to be made to the local authority for permission to change the permitted use.
It is also important to bear in mind that if you are looking to carry out fit-out works or alterations that you may require planning or building consents for these. Landlords will want all necessary consents to be obtained before any work commences.
Licences may also be required for the business you wish to carry on at the property (for example an alcohol licence, late hours catering licence or a tattoo and piercing licence).
Whatever type of consent that you may need, the main thing to remember is that it takes time to get one. Some planning, building or licensing applications can take several months to be processed by the relevant authority so it is important to factor this into your timescales.
If you would like to discuss any of the issues raised in this article, or any other property related matter, please get in touch with a member of our team
