Commercial Tenants

Some Issues To Look Out For When Taking A New Lease

If you are starting a new business venture and need some premises to run your business from, or if you are moving an existing business to new premises, you will have a lot on your mind.  Firstly, congratulations!  Exciting times are ahead!  

Finding and securing the right premises for you can be a daunting task.  You will likely have many, many questions and may not know where to start when agreeing to the terms of your new lease.  Here are some pointers for you, which may come in handy when you are negotiating terms with the estate agents who are handling the letting:

1 – References

Get your references ready.  A landlord is likely to want some comfort that you are going to be a good tenant, i.e. that you are good for the rent and will look after the property.  The estate agent who is advertising for the landlord will let you know what they will need, but it would be a good idea to get some company accounts ready, if you have them, to show that you’ve been operating at a profit, as well as any reference you may be able to get from a previous commercial landlord.  If you don’t have these, then some sort of business character references, perhaps from your bank manager, might be useful.  Try and get some suitable referees lined up in plenty of time, so if you do find your dream premises, you are ready to go and convince the landlord to take you on.

2 – Rent Deposit

This is related to the above in that if the landlord wants some reassurance that you will be good for the rent, they may ask you to put down a rent deposit.  This works in a similar way to a bond for a residential property, and the landlord would keep this in an account so that if, for example, you fail to pay rent or service charges (see below) in the future, or if there is any damage or want of repair to the premises that is down to you as the tenant, then the landlord can dip into the rent deposit and pay it out of this.  They would then be able to call upon you to top the deposit back up to the agreed minimum amount.  A typical amount would be 3 months’ rent, but it’s up for negotiation.   If you’re not keen on giving a rent deposit but the landlord insists, a compromise might be to offer the rent deposit but have it paid back to you if you are up to date on all rent and any other payments for a continuous period of, say, 2 or 3 years.  That way, you would get back the deposit before the end of the term, which is when it would otherwise be repaid to you.  Be aware that any rent deposit can usually be used by the landlord to bring the property back up to scratch at the end of the lease, so you need to be careful as to what tenant’s repairing obligations you sign up to (see below).

3 – Rent Free Periods

Some landlords recognise that tenants have up front costs to get the premises ready for them to start operating, and that you won’t necessarily be able to start trading or making any money for a while, for example, if you are being handed a shell of a property and need to fit it out as a café.  This is when a rent-free period is really handy.  These are typically around 2-3 months, though they can be shorter or longer, depending on how negotiations go.

4 – Planning

Be aware of the existing planning use – is any change of use needed?  E.g. if it has been used as an office but you want to change it to, say, a hairdressing salon, you may need to apply to the local authority for permission to change the use.  Consider what has the property been used for most recently? And for how long?  If you need to change the planning use, you will need to factor the costs and time in applying to the relevant local authority’s planning department into your decision to proceed, and to your budget as well.

5 – Licensing

Consider if your chosen business needs any licence to operate, such as the sale of alcohol.  If it does, the landlord will want you to comply with any licensing laws, so it’ll be up to you to apply for a licence.  You will need to obtain any licence before you complete the lease, otherwise you could end up having committed to a lease (and a certain number of years’ rent) without legally being able to use the premises for its intended use.

6 – Length of Term

How long do you want to be tied in for?  Another way of looking at this is, how long do you want to have security for before the landlord could re-let the property to another tenant?  You need to ask yourself what is the minimum amount of time you would accept, and what is the maximum time.  

Generally you cannot get out before the whole lease term is up, but  sometimes a landlord might agree a “break clause”.  A break clause can allow a tenant to break a lease early, as long as you give the prescribed amount of notice.  Often a break is agreed at the third anniversary of the start of the lease, but this is negotiable, so you can ask for a break to be at whatever juncture would be suitable for you.  Be careful though – if you don’t exercise the break and give the correct amount of notice, the likelihood is you’ll lose your right to break the lease and will remain tied in for the full length of the lease term.  A way around this would be to ask for a rolling break, which you can exercise from a certain date onwards, on a certain amount of notice, until the end of the lease term, but these aren’t that common.

7 – Repair Obligations

i.e. who is responsible for which parts of the premises.  Often estate agents and landlords use a misleading term to describe most commercial leases on offer: “Fully Repairing and Insuring” or “FRI”.  However, whilst this implies that the tenant is responsible for the whole of the property and for insuring the building, often, in reality, this is not the case, so it’s worth checking with the agents.  If the premises you are leasing are only part of a building (rather than the whole of it – e.g. just the ground floor of a two storey building), it is more than likely that you will only have to repair the internal non structural parts of the building – usually, what you can see from the inside when you stand inside the premises themselves.  This is what you should be looking for – to make sure that the more expensive items to repair, i.e. the structural parts like the roof, the foundations and the structural walls, remain the responsibility of the landlord.  However, just be aware that where the landlord does retain responsibility for any parts of the building, it is likely that you will be charged service charges to cover his costs for this – we discuss these below.

8 – Repair Obligations For Older Properties

Wherever possible, if you are looking at renting anything other than a brand new property, it is a good idea to ask for a “schedule of condition”.  This is usually photographic evidence of the condition that you are taking the premises in at the start of your lease, so that there is no argument at the end of the lease whether you have complied with your obligations to keep the premises in a certain state of repair.  A landlord will usually want you to hand the premises back in a good condition, so you don’t want to be signing up to handing them back in a better condition (at your cost and effort) than you took them in the first place.  

9 – Service Charges

Ask the agents if service charges are being charged, and if so, ask what the expected annual charge is going to be for you.  If possible, see if you can get hold of a service charge budget, so you can see what this money is being spent on.  Typically, it will go on insurance for the building as a whole, repair and maintenance costs for any communal areas (such as hallways, stairs, and communal washrooms etc), cleaning, and sometimes (usually less frequently) on larger items of repair like the structural walls, roof and foundations. If you can, ask the landlord if you can have your service charges expressed as a fixed percentage of the total for the building, then you will have more certainty as to what you will be paying.  Sometimes a landlord might agree to a “service charge cap” so that your service charges won’t go above a certain level; this is well worth having, as otherwise service charges can go up significantly during the course of your lease.

10 – Alterations

If you need to make any alterations to the property, for example to fit it out for your intended use,  you will need to check whether the landlord will permit this.  It’s best to get plans and specifications for your proposed alterations over to the landlord (or through the estate agents) as early as possible, so that they can consider what you are intending to do.  You are likely to need the landlord’s consent even if the alterations are relatively minor, non-structural ones.  It’s a good idea to be as specific as possible, as lots of landlords prefer to have very detailed plans so they know exactly what you are going to be installing into their premises, and where.  You should be looking for a licence for alterations as part of the lease negotiations, as this will then document the evidence you need to show that the landlord did give their consent to your works.

Lindsey Bowles – Residential & Commercial Conveyancing Solicitor

Here at Hopkins Law, we have the expertise from our commercial property lawyers to guide you through this process, as well as representing you once you have got the terms all agreed.  For more information call us now on 029 20 395888 for a FREE initial consultation.