13 steps before taking out a commercial lease

When you decide to take out a commercial lease it is important to choose the lease that best suits your business and to negotiate terms which will enable your business to thrive. Your decisions have the potential to make or break your business. Lease agreements are normally drafted in the landlord’s interests so it is important to seek business advice from a legal expert who will discuss your options with you and negotiate the most favourable terms. Here we guide you through the steps to follow before you sign a business lease.

1. Work out whether you’re taking out a lease or a sublease

When you lease premises from the tenant of the original owner (the landlord) this is called a sublease.

As part of their commercial lease agreement, landlords sometimes allow their tenants to sublet a property. Permission to sublet protects tenants if they find themselves in a situation where they struggle to pay the rent. In order to reduce expenses, the tenant (sublessor) will be motivated to find a tenant (sublessee) quickly.

However, if you are considering taking out a sublease it is important to understand the original commercial lease between the landlord and sublessor. Sometimes a sublessee pays the rent and meets the terms of the sublease but because the sublessor has defaulted the sublessee is evicted from the premises. There are also other restrictions involved with subleases. For example, the landlord may be able to terminate the sublease if they do not approve of the sublessee’s business. We understand that these terms can often be confused, so for legal advice about your situation, speak to our commercial conveyancing team.

2. Take note of the permitted use class

The use of a commercial premises is set out under planning law and the terms of the lease. This is called “permitted use”. Permitted uses are defined under the Use Classes Order 2017. For example, shops, travel agents and post offices are Class A1 whereas restaurants and cafes are Class A3.

To change the use of a commercial property the landlord’s consent will be needed and planning permission may also be required.

3. Carry out title investigations, searches and enquiries

Your solicitor will need to carry out a number of checks on your behalf, including:

  • Confirming that the landlord is the legal owner of the property, and whether anybody else has rights over the property that could cause you difficulties.
  • Planning permission checks. Is planning permission in place that will allow you to carry out your business at the property?
  • Local Authority Searches. This includes everything from proposed new traffic schemes, to preservation orders and financial charges raised against the property.
  • Enquiries with the landlord’s solicitors. This involves examining the particulars of the lease.
  • Water and Drainage Search.
  • Environmental Search. The result could mean that extra surveys or enquiries will be needed.

4. Instruct a surveyor

Under the terms of a commercial lease tenants are normally responsible for the costs of maintaining and repairing the property. Therefore, it is important to instruct a surveyor to carry out a search so that you know what work may be required and the likely financial implications for your business.

5. Check the Stamp Duty Land Tax and any Land Registry fees

Stamp Duty Land Tax (SDLT) is payable on completion of a lease. SDLT is calculated on the net present value of rents payable as specified in the lease and any premium. Find out more with the government’s tax calculator.

6. Define your fixed term

Usually commercial leases are granted for a “fixed term” which means that the lease begins and end on specific dates. However, either party may be able to terminate the lease earlier if there is a Break Right in the lease. The landlord cannot raise the rent during the fixed term period.

Under the Landlord and Tenant Act 1954 the tenant may have the statutory right to renew their lease when the term is up. However, a lease can contract out of the Landlord and Tenant Act which means that there is no right to renew.

When deciding how long the fixed term of your lease should be, you need to take into account the projected growth of your business making sure that your lease won’t negatively impact your cashflow but still provide room for you to expand. If, for example, you plan to invest heavily in machinery installation a longer lease might suit you. A shorter lease will be better if you are concerned about long-term rent obligations.

7. Negotiate demise responsibly

The part of the property that the tenant has been granted the right to occupy and use is called the ‘Demise’ in the lease. It is important to understand the extent of the Demise so that you know what your obligations will be in terms of repairs and maintenance.

The extent of your Demise can have all sorts of implications. You will not normally be entitled to alter any part of the property outside your Demise but what happens, for instance, if you need to widen a door to comply with disability discrimination legislation? That’s when a legal expert will be able to support and advise you about how you can negotiate your Demise.

Alongside the lease, a detailed plan and description will help you to ensure you are leasing what you think you are leasing and to be clear about your obligations.

8. Agree on the rent and rent review periods

Many tenants don’t realise that they can negotiate the rent and rent review clauses in their lease. By negotiating, you can achieve fairer terms that suit your business needs.

When rent is reviewed the landlord can adjust the rent to reflect current market value. This should mean that rent can go down as well as up, but it doesn’t! When there’s a downturn in the market the most likely outcome will be that your rent stays the same.

The frequency of rent reviews is documented in the lease. Reviews normally happen every three to five years. A commercial property lawyer will review the lease to make sure the terms are fair.

9. Pay attention to service charges

The service charge is the cost of maintaining and repairing a property that the landlord charges back to the tenant. As well as repairs and maintenance, service charge can include insurance premiums and employing staff such as gardeners and cleaners. Landlords may also want to collect money for a “sinking fund” in case unexpected costs arise such as roof repairs.

You can limit the amount of service charge you pay by negotiating before you sign the lease. The advice of a commercial property lawyer is invaluable here.

10. Note any special clauses

Sometimes leases have special or non-standard clauses. For example, a lease might specify that the tenant has to pay the landlord’s legal fees.

Special clauses can have a huge impact on your business, and an experienced commercial property lawyer will check for these.

11. Make sure the property is insured

In a commercial lease the landlord is normally required to insure the premises with the tenant reimbursing a proportion of the premium. The landlord’s policy will insure against a comprehensive list of risks. However, not all risks will be insured and if there is no mention of uninsured risks in the lease the obligation to repair may fall to the tenant. Most leases specify that uninsured risks (unless caused by the tenant) will be repaired by the landlord and that the tenant may receive a rent suspension in the meantime.

Sometimes a lease will specify that the tenant is obliged to insure the property. Where the tenant is responsible, the lease will specify the level of cover required. It is vital to establish who is responsible for insurance from the outset to check that insurance is in place and that landlord and tenant are not both paying.

12. Be wary of the state or repair at the start of the lease

Usually commercial landlords are responsible for any structural repairs such as foundations, flooring, roof and exterior walls, and tenants are responsible for non-structural repairs such as air conditioning or plumbing.

Tenants are normally responsible for maintenance and repairs not specifically identified as the landlord’s responsibility in the lease.

The lease may specify that the tenant must keep the property in good condition, even if the property wasn’t maintained to the same standard at the start of the lease - this is called a ‘full and repairing lease’. It is imperative to be fully aware of the condition of a property before signing a lease.

13. Get legal advice

The majority of landlords hire a lawyer to protect their interests, so it is important that tenants do the same.

Your lawyer will carefully examine the commercial lease and explain the terms to you. They will negotiate the clauses and what should be included in the lease. A clear and fair agreement avoids disputes later and prevents you from running into financial difficulties.

For business lease advice contact Insight Law on 02920 093 600.

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