Renting or Leasing Commercial Property
Renting commercial property usually represents a major part of the operating costs involved in running any business. If you include surveyor’s and solicitor’s fees, rent, business rates, insurance, service charges and/or repairs and maintenance these items can easily make up 20% to 30% of your first year’s operating expenses.
It’s very important therefore that you get the right premises for your present and future needs and that you don’t commit yourself to something you cannot afford if things go wrong, or if your new business does not take off as planned. Remember, something like 2/3rds of all new businesses fail within the first 3 years!
Not many new businesses have the wherewithal to buy a freehold property, so taking on a lease is often the only option you have. If you are new to renting business premises you need to be aware that there are a lot of legal implications which may not be immediately obvious.
The Commercial Lease and Negotiations
You should be aware of some important differences between renting residential accommodation and taking on a commercial lease if you are to avoid some serious potential pitfalls:
- As a commercial tenant you have far less protection than a residential tenant. In effect whatever contract you negotiate is binding on you and your business and by not fulfilling all your obligations you can end up with serious financial consequences.
- Commercial (business) leases tend to be much less standardised than residential ones, and therefore you need to read them very carefully.
- You need to bear in mind that with a commercial lease almost every aspect is open to negotiation. You can do this yourself providing you know what you are dealing with, otherwise get expert help.
- Market forces determine the nature and terms of a business lease much more than with a residential tenancy. If the current market favours the landlord, there being a high demand for his property, then he can negotiate more favourable terms for himself, and vice versa.
Understanding the Legal Implications of Leases
It is most important that you understand every aspect of a business lease and your obligations under it. Do your homework by reading up on the subject – see our bookssection – and ask a qualified surveyor or a solicitor with property experience to interpret the lease for you if you’re not sure.
Accepting terms that are very restrictive or onerous can saddle you with business premises which become a real liability if things go wrong or the economic climate changes. Remember you are committing yourself to paying rent for the length of the lease – if you have a 10-year lease and your business fails after 3 years, you still owe the landlord 7 years rent!
Business leases are often of the “Full Repairing and Insuring” (FRI) variety, which means that you as tenant take on all repairing and maintenance obligations and building insurance costs.
You need to make absolutely certain that the building is free from major defects before taking on the FRI lease. If the building already has defects when you take on the lease you could find yourself having to put these to rights, so you should have a qualified building surveyor / structural engineer, or at the very least a qualified builder report on the condition.
Taking on a long lease when the future is uncertain can lead to problems. The length of leases has gradually diminished over recent years due to increasing uncertainties in the business environment.
The traditional institutional lease of 25 years is becoming much more of a rarity, except in the finest of prime properties.
15 years is now more common and 10, 9, 7, 5, 3 or even 1 year in the secondary property areas is not unheard of these days.
Break Clauses in Commercial Leases
With a new venture it’s important to consider negotiating a break clause, allowing yourself a safety net should things go wrong. This enables you the tenant to terminate the lease after a certain period, but still retain the right to carry on if they so wish.
Remember though, for a break clause to be operable you must have substantially complied with ALL your obligations under the lease – that means paying your rent and service charges on time, and maintaining the premises etc.
Remember that break clauses often have conditions attached which are very difficult to meet, so you need to ensure during the negotiation phase that the break clause has as few such conditions as possible
The Lease term.
Generally speaking the longer the term you are willing to commit yourself to, and the more onerous your lease terms, within reason, the lower should be the rent you pay, and of course, vice versa.
You need to negotiate the best deal you can on rent. It’s usual for a lease to contain provisions for rent reviews a certain periods, for example every 3 or 5 years. Depending upon the market and the area you are in, your rent can increase considerably over time.
Security of Tenure and its Exclusion
As a commercial tenant you have statutory protection at the end of your term. This means that under the provisions of the Landlord & Tenant Act 1954 the landlord cannot automatically evict you at the end of your tenancy.
However, some landlords will want to exclude these provisions in your tenancy. He can do this if you agree to it at the start, by allowing the lease to be “outside the Act”. Be aware of what you are agreeing to here.
A New Business Tenant’s Checklist
- Find out the market rent in the area. This can be done by asking local agents and checking comparables – rents and prices of local property currently let or recently let or sold.
- What is the norm in the area for lease terms given the state of the local market and the condition of the premises? Again look for comparables.
- Have you considered the lease term (length). Is it appropriate or are you taking too big a risk if things go wrong?
- Is the lease quite short, or is there an unconditional break clause in the lease, allowing you to surrender it early?
- If you are taking on a full repairing and insuring lease (FRI) have you had the premises surveyed to make absolutely sure of the condition?
- Have you checked with the local authority for its planning permission. Does the Use Classification of the property allow you to use it for your present and future needs.
- Have you checked the use clause in the lease, and does it allow you to use the premises for your proposed uses?
- Do you have full statutory protection under the Landlord & Tenant Act, or does the landlord intend to exclude these provisions by having you agree to a rent “outside the Act” ?
- Have you checked with your local authority about rateable value and the business rates payable?
- Have you checked the clause in your lease which covers rent reviews? Is this fair?
- If you are a limited company does the landlord want personal guarantees from the directors of your company? If so, how much personal risk are you taking?
- Does the landlord require a guarantor – someone to stand surety and guarantee rent payment on your behalf?
- Does the landlord require an ingoing premium payment or a rental deposit?
- Can you provide good references if the landlord requires these from your bank, your accountant or trading suppliers or customers? Will you pass a credit check?
- Landlords sometime ask for a contribution to or even the full cost of the lease from the in-going tenant. In the case of secondary properties this is negotiable. A fair compromise on this is that both parties pay their own lea gal costs and the cost of the lease is shared 50/50.