Top tips for Commercial Property Tenants

Entering into a commercial lease is often an exciting milestone for any business venture – whether moving into your first premises or expanding into a new space. However, agreeing terms with a landlord or agent without fully understanding the legal and financial implications can cause a significant risk to your business’ wellbeing. Commercial Property Partner, Shilpa Unarkat explains the top tips for commercial property tenants.

We are often approached by clients who say that they have agreed terms with the landlord or with the landlord’s agent but find on closer inspection, that they are arduous, or our client has not fully understood the implications of what they have agreed.

Where a client has not had the benefit of a surveyor’s advice (remember that the landlord’s agent will act on behalf of the landlord, not the prospective tenant), we are more than happy to review the draft Heads of Terms but would suggest that the following matters are borne in mind if you negotiate the terms as a prospective tenant:

1. Premises – Will the Lease be of part of the building or the whole of it? This will have important implications for the tenant’s repairing and decorating obligations.
2. Term – Try to negotiate as much flexibility as possible. There is no standard length of term for a Lease so it will be up to you and the landlord to negotiate a term that works for both of you. If you are happy to take a lease for a longer term (say 5 or more years), you should consider a right to terminate the lease (a “Break Right”- see below).
3. Security of Tenure – A tenant of business premises will have the benefit of certain protections given by legislation so that it can remain in occupation beyond the contractual term and will be entitled to a renewal lease. Where a renewal lease is not granted, the tenant will be entitled to compensation in certain circumstances. It is therefore important, where possible, to resist the exclusion of these important protections.
4. Rent – You should, where possible, seek the advice of a surveyor as to whether the rent that the premises are to be let at represents the market rent for similar premises in the area. You may be able to agree a rent-free period. If the Lease will be for a longer period, the landlord may require rent reviews, say every 3 or 5 years. This will be subject to negotiation and will almost always be on an “upwards only” basis so that if the market falls, the landlord will continue to receive rent at a rent that is no less than what they were getting before the market fell. The annual rent can be reviewed by reference to turnover, the retail prices index or, as is more usual, by reference to the open market rent.
5. Service Charge - If the landlord will provide services, such as maintenance and repair of common parts and roadways or repairs to the structure of the building, you must be aware that the sum payable will change from year to year. If possible, try to negotiate a limit.
6. Personal Guarantee – If you propose to take a Lease through a limited company, especially one that is newly incorporated, the landlord may request that the directors of the company give personal guarantees to comply with the terms of the Lease on behalf of the company. Ideally this should be resisted as this would put the director’s personal assets at risk. A rent deposit would be easier to administer by the landlord and so a tenant may seek to offer a rent deposit instead or a greater sum instead of offering a personal guarantee.
7. Repairing obligation – If you are offered a lease with a full repairing obligation, this means that you will be required to put the premises into good state of repair and condition and keep them in good and substantial repair and condition. As mentioned above, the extent of the “premises” will determine what parts of the premises you will be responsible for. A lease of the whole building will mean that the tenant will be responsible for the whole – including the interior, the exterior, the roof, the structure, the pipes, wires, cables, heating and water apparatus, etc. This could be onerous. With a full repairing obligation, you will not be able to argue that the premises were in a poor state of repair and condition when you took them. To avoid this, a tenant should seek to agree a limited repairing obligation at the outset so that the tenant’s repairing obligation will be limited by reference to a Schedule of Condition. This is usually acceptable to most landlords, but a full repairing obligation will always be suggested first!
8. Alienation - The ability to transfer (assign) the lease and underlet (sublet) the premises will be important to a tenant (to allow it to “exit” early). It will usually be permitted subject to obtaining the Landlord’s prior consent and complying with certain conditions.
9. Break Right - A right for the tenant to terminate its lease early will give the tenant flexibility. The tenant will not need to find a new tenant as it would on an assignment or underletting. Try to negotiate a break right that is not conditional on the payment of a “penalty” or on the compliance of the lease covenants.

Negotiating a commercial lease isn’t just about securing premises, it’s about protecting your business, your finances, and your future flexibility. Many of the most onerous clauses can be softened or restructured if addressed early in the negotiation process.

If you are considering taking on a commercial premises or have already agreed terms and would like them reviewed, seeking legal advice at the outset can save significant time, stress, and cost later on.

Our experienced commercial property team would be happy to review your proposed Heads of Terms or draft lease and guide you through the process with confidence.

Get in touch today to ensure your lease works for you — not just your landlord.