Leasing commercial space is no walk in the park. Yes, it is similar to a residential property in terms of paying rent, provisions in the lease agreement to protect you and the landlord as well as general running costs to consider. As a tenant, your responsibilities are governed by law, but the specifics depend on what the detail states in the lease.
However, a commercial rent agreement or lease can usually contain numerous pages of detailed provisions, most of which are bound to affect your bottom line. As such, you need to go through every page and understand what it means. Do not assume because it is a formal document that it must be right. Making this decision can be exhilarating, but it is a huge step and you need to ensure you are properly protected. Even huge organizations that have moved premises in the past still call for professional help.
Generally, each situation is different and the leverage you have will certainly affect how much you can negotiate the terms. However, with every contract, being forewarned is being forearmed. That being said, here are 6 important things to keep in mind when taking out a business lease.
1. Allow Adequate Time at The Start
Once you have identified a property that seems to suit your needs, it can take months before you sign the lease. Ensure you’re clear about the date you wish to move in and if there is any flexibility. Both you and the landlord will want to protect their interests and chances are there will be some to-ing and fro-ing. So, even the simplest of leases may take a month.
2. Is the Premises Suitable for Your Business?
It is imperative to consider the rights you will be given in the rent agreement. In addition to rent, tenants are usually tasked with business rates, utilities, and service charges. If you’re expected to cover these costs, check the building’s efficiency rating and if the landlord has covered their MEES obligations right. It could be that some improvements need to done, which can have an effect on the running costs.
Ensure that your lease clearly sets out what rules apply to the premises in general, like allocated parking, communal space, delivery restrictions, loading bay, etc.
Permitted use is vital. All commercial space rental agreements stipulate a permitted use for the lease term. A broader permitted use is often preferable and so, before signing up, check with the planning authority that the designated use of the premises doesn’t conflict with what you intend to use the space for. If it does, then you’ll want to apply for planning permission for what’s known as change of use.
3. What is the Lease Term and is it Changeable?
The lease term is vital. The rent cost might be appealing, but it does not make sense to sign a long-term one if your plans aren’t certain. As such, you may want to consider a break option. Similarly, you may want to have an option to extend the lease, particularly if you have invested your money in an expensive fit-out.
Lastly, you’ll want to be sure that the lease doesn’t exclude your rights under the 1954 Landlord & Tenant Act. You may find yourself in a position where you can’t renew your lease when the current one expires.
4. Negotiating Rent, Review Obligations & Clauses
When it comes down to rent negotiation, your primary goal will certainly be renting the space at the best price possible. Commercial spaces are usually priced per Sq. Foot. Landlords tend to be hesitant when it comes to discounts, but you can be able to negotiate for several months of ”free rent”.
Although most rent-free periods tend to apply at the start of the lease (common as an incentive or during the fit-out period), you might be lucky and choose other points during the term. There can be a VAT benefit for the landlord or even help in situations where the landlord needs to report a specific price per square foot to their bank or investor.
When it comes to review clauses, the devil is in the detail. According to the law, rent cannot go up more than once in 12 months and landlords need to notify all tenants about the change. However, your lease might include review provisions and it is important to ensure you comprehend how it will affect the rent:
The commonly used methods include:
Stepped Rent Increase- This increases rent by a set amount on particular dates.
Upwards Only Review- Either the cost remains the same, or increases in accordance with the market. This is not always easy to predict.
Retail Price Index Review- This one is linked to inflation and tends to be easier to judge.
Depending on your business, there will be pros and cons of each. Lastly, it is important to comprehend your rent obligations. Interest for late rent payments is standard, but again, it is important to check the contract. If you fail to pay the landlord on time, you may give them the right to terminate your lease early. This is known as forfeiture and allows the landlord to change the locks when the rent is not paid.
Be careful in this aspect as the landlord doesn’t need to take the matter to court and can usually take action after a week.
5. Who Makes The Repairs?
More often than not, a commercial premises lease requires you to keep the premises in ideal condition in terms of decoration and fully repaired. Keep in mind that this may apply even if you occupied the space in poor condition.
As such, it is imperative to always inspect the premises thoroughly before signing the lease. Getting a professional surveyor to examine the property before you move in and raise any concerns will likely save you money. A survey will identify problems like damp and dry rot resulting in saving on unnecessary repair costs.
At the end of the lease, you need to return the space to its initial condition. Often referred to as dilapidations, this process is often stipulated in the lease and involves removing fixtures and repairing any damages. A lease will often make allowances for minor wear and tear and as a result, you will be liability-free.
In order to avoid problems down the line, it is advisable for the landlord to agree to the repairing covenant from the onset to be limited by a schedule of condition. This document should then be added to the lease, highlighting the state of repair during the time you sign the lease and set the expectation of how the premises need to be returned.
6. When Can You Serve a Notice?
More often than not, a break clause is agreed upon by the landlord and tenant at the onset. This is a clause in the agreement that allows you to terminate your lease early than initially stated.
There’s usually a series of conditions that have to be met before putting a break clause into action. These have to be strictly adhered to, or you will have to continue with the lease. Ensure you check these conditions carefully and include any vital dates to your reminders so that you can properly execute the break when you need to.