In this article, Michael Fahy reviews his top tips for taking commercial leases, including break clauses, checks to ensure that the rent is at a reasonable rate, and who is responsible for repairs.
1. The Term of the Lease
Generally, a business Lease is granted for a “fixed-term” starting and ending on fixed dates. It is not uncommon to have shorter-term Leases of 5 years or less. You may want a shorter-term Lease if you are just dipping your toe into the market, or consider a longer-term Lease if you are spending on fit-out and want to spread the cost over a longer period.
Ideally, you want to have Commerical Leases which is protected by the Landlord and Tenant Act 1954 so that you have a statutory right to renew the Lease at the end of the term.
2. Break Clauses
Flexibility is important to accommodate any market changes, such as your business suffering a downturn; potential re-location; or expansion. You should try to negotiate a break clause to provide a right to terminate the Lease at an earlier date than the end date under the lease.
A considerable amount of care should be taken in the wording of any break provisions and it is important to ensure that the break right is not subject to unreasonable conditions.
You may wish to assign your interest in the Lease in the future or to keep your interest in the Lease, but allow another party to use part of the property by way of an underlease.
We would not usually expect to see an absolute prohibition on assignments and underlettings as this would mean that the Tenant is tied into the Lease until the end of the term. Generally, a Tenant should be permitted to assign or underlet the whole of the Property with the Landlord’s prior written consent, which is not to be unreasonably withheld or delayed.
It is essential that you focus on these provisions to ensure that they adequately reflect your proposed use of the property. If you wish to share the property with other users, this should also be negotiated with the Landlord at the outset and provided for within the lease.
4. Rent and Reviews
You should check that the rent is at a reasonable rate for the location and type of property and consider whether it is affordable. It is also important to consider whether the Landlord will be charging VAT on top of the rent, and if so, whether you will be able to recover this VAT.
In this economic climate, Landlords may be willing to agree to a significant rent-free period therefore a rent-free period is certainly worth trying to negotiate.
Commercial Leases will usually provide for the rent to be increased during the Term, it is important to consider how often it will be reviewed and what the basis will be for the rent review. You should ensure that you are able to forecast for future rent reviews.
5. Repairs and Dilapidations
Most commercial Landlords will seek to avoid any responsibility for repairs to the property and require the Tenant to put the property into repair even if it is in a state of disrepair at the date of the Lease. As a result, the Tenant could find itself with a very costly repair bill running into tens of thousands of pounds.
Ideally, you should ensure you are under no obligation to put the property into any better state of repair and condition than it was at the date of the Lease, as evidenced by a photographic schedule of condition attached to the Lease.
If the property is part of a larger property, it is also important to ensure that the Landlord is obliged to repair the parts of the property not being used by you, such as the exterior part of the building, the roof and any common parts.
6. Service Charges
If the Lease is for the entire building, you are likely to be responsible for all the outgoings associated with the building. Where the Lease is of a part of a building, it is generally easier for the Landlord to pay the outgoings and then bill the Tenant for its respective share.
It is important to be aware of the likely amount of the service charge so that this can be budgeted for and what costs the Landlord will include in the service charge. The service charge will usually cover the costs of repairing and maintaining the common parts. The Landlord may also want to collect a sum to put towards any major expense in the future, this is known as a “sinking fund” or “reserve fund”.
It is worth trying to agree on a cap on service charges so that they do not spiral out of control.
7. Permitted Use
It is essential to check that the Permitted Use, set out within the Lease, covers all of the uses you wish to make of the property. For example, if the user clause only permits you to use the property for offices, this may not allow you to run external training courses at the property, therefore each and every proposed use must specifically be covered in the user provision.
Consider whether there is planning permission in place which covers your proposed use of the Property irrespective of what the permitted use is under the Lease.
Generally, the Landlord will insure the building and you will be required to pay a proportion of the premium payable relating to the area being demised to you.
Commercial leases should contain a provision obliging the Landlord to re-build and reinstate the Property in the event that the property is damaged by an insured risk.
There should also be adequate provisions in place to protect you if the property is damaged so that it is unfit for occupation and use. In this instance, the rent should be suspended for a certain period of time and you should be entitled to terminate the Lease if, at the end of this period, the Lease is still not fit for occupation or use.
9. Rights Granted
Ensure that the Lease grants you any rights over the Landlord’s property outside the area in your Lease required for your use of the property. For example, you may require a right to use car parking spaces, communal facilities for showers and meeting rooms, stairs and lifts or rights to access any footpaths or roads.
If you anticipate altering the property ensure this is agreed with the Landlord at the outset and that any future alterations will not be unduly restricted. We would expect the Tenant to be permitted to carry out alterations to the property with the Landlord’s prior written consent which should not be unreasonably withheld or delayed.
You should bear in mind when you are carrying out alterations that under the terms of any licence or consent to alterations there is likely to be an obligation for you to reinstate the property at the end of the term and therefore these costs need to be budgeted for.
If you would like any further information regarding our top tips to regarding commercial leases, or you would like to speak to a member of the Commercial Property experts, please do not hesitate to contact them by emailing email@example.com or calling 01603 598000. Appointments are available at our Norwich, Diss and City of London offices.
*The information provided in this article is designed to provide useful information on the subject, not to provide specific legal advice.