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Leasing a Commercial Property – A Guide…

Date Added 21.09.22

Are you thinking of leasing a commercial property?  If so, there are a few factors to consider when negotiating the key lease terms.  We have set out a list below to guide you through this process.

The ‘property’

One of the first steps in the negotiation process is understanding the full extent of the property being let.  A lease can be of whole or of part of a property and it is important to distinguish between the two.

If a lease is of part of a property, then a plan will be needed to identify the relevant area being let.   You will also need to consider whether you need any rights over the landlord’s remaining property, for example a right of way or a right to park.

Length of the lease

The length of the lease is an important factor to consider as it will determine how long your obligations under the lease will last.

Generally, the shorter the lease the more flexibility you will have if for whatever reason you do not want to stay in the property for the long run.  However, you will need to balance this against the stability that a longer-term may provide.  Your financial situation and the local market will have parts to play in this decision.

Another point to consider is whether the landlord is trying to exclude security of tenure.  Generally, commercial leases benefit from security of tenure which means that you will have a right to remain in the property after the end of the term (although there may be a rent uplift).  If security of tenure is excluded then you will not have any right to remain in the property and the landlord does not have to grant you a new lease at the end of the term.

Annual rent and other costs

One of the key points to negotiate is the costs you will incur.  You will need to consider whether the annual rent and other costs (such as service charges, insurance rent, utility costs and business rates) are viable in the long term.

The rent may be subject to VAT.  The default position is that commercial property is exempt from VAT, but a landlord may choose to tax the property which means that you will need to pay VAT on top of the annual rent and other costs due in the lease.

Repairs

Often tenants think that when they take a commercial lease, the landlord will accept ‘fair wear and tear’.  Unfortunately, this is not usually the case.  Generally, you will be responsible for repairing the property to a good and substantial “A1” condition.  If the property is not in that condition at the start of the lease, then you may find yourselves repairing the property to a better condition which could be costly.

There are a few options to limit this fairly onerous repairing liability.  Firstly, if you are taking a lease of part of a property only (see above) then usually you will only need to repair the interior and the landlord will be responsible for the exterior or structural parts.

Secondly, you may wish to exclude any specific parts of the property (e.g. the roof or flooring) from your repairing obligations, so that the landlord will remain responsible for repairing these parts.

Alternatively, a common arrangement is to limit your repairing liability with a schedule of condition which is a set of photos and/or written description of the condition of the property at the start of the lease.  You will only need to repair the property to the condition that is shown in that schedule.

Alterations

Most commercial leases will allow internal alterations with the landlord’s consent but will prohibit any structural or external alterations.

If you are planning on carrying out any significant works to the property then the landlord may require a ‘Licence for Alterations’.  This will formalise their consent to the proposed works.

Landlord’s security

A landlord is leasing their property in the hope that they will receive full rental payments on time and that you will comply with all of your other obligations in the lease.  If this is not the case, then the landlord is likely to suffer financial loss.

As a result, often landlords require some security in the event that breaches occur.  A rent deposit may be required to compensate the landlord for any loss they suffer, and it is usually the equivalent of 3 to 6 months’ worth of rent.  Alternatively, if the tenant is a company then the landlord may request that an individual director acts as a guarantor under the lease.  This means that the landlord may pursue that individual personally for loss or damages resulting from a breach of the lease.  The liability of a guarantor is unlimited so you will need to think carefully about this before agreeing.

Options to vacate

Finally, whilst we hope that everything runs smoothly in your new commercial property, it is sensible to think about some ‘get out’ options.

You may wish to break the lease early by giving the landlord notice to vacate.  Often, such notice will only end the lease if all payments are up to date and you leave the property empty.

Alternatively, you may be able to assign or sub-let the lease.  Assigning will transfer your interest in the property to a third party, but it is common that you will give a guarantee that the new tenant will comply with their obligations.  If you sub-let the lease you will be creating a new lease and will become the landlord of the sub-tenant.

Next Steps and overall process

In most transactions, the landlord or their estate agent will usually issue Heads of Terms once the key points of the lease have been agreed.  The landlord’s solicitor will then produce a draft lease which the tenant’s solicitor will review and negotiate.  The tenant’s solicitor will also carry out any other matters relevant to the transaction, which may include submitting searches, raising enquiries and reviewing the landlord’s freehold title.  Once the lease has been agreed and the other matters undertaken, you will receive a report and the documents for signing.

If you are considering leasing a commercial property…Talk to Tollers on 01604 258558, our Commercial Property team is here to guide you through the process from the negotiation stages to picking up your keys to your new property.

 

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