Before taking on a commercial lease, it’s important to check the document carefully. Obviously, this applies to any legal contract, but smaller business owners in particular may be unfamiliar with the terms and conditions that go with the leasing of premises – be they office space, a shop or restaurant, a workshop or medical establishment.
A lease should always be agreed in writing (though there are some cases where a verbal lease agreement may have the force of the law) and it is imperative that you review the rights and obligations set out in the document with a fine toothcomb before committing to it.
At Bradley-Mason, we deal with a wide range of clients from a variety of sectors including hotel, leisure & tourism, healthcare, retail, industrial and property sectors, advising on building consultancy and compliance, acquisition, occupancy and disposal with a portfolio of specialist services. We’ve put together an overview of some of the most common terms used, and what they could mean for your business.
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Security of Tenure
The document should state whether the lease is protected by the Landlord & Tenant Act 1954 or whether it is contracted out of that Act. If you have security of tenure, you have the right to a new lease at the end of the existing one. If not, you will have no such right and can be evicted immediately upon the expiry of the lease.
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Rent
The lease will stipulate the rent amount, when it is payable and sometimes the mode of payment too (e.g., direct debit or standing order). Monthly rents are often paid quarterly in advance on the ‘quarter days’ of 25th March, 24th June, 29th September and 25th December. Typically, there will be no formal demand or invoice issued, though you will likely have to pay interest at a specified rate on late payments.
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Rent Reviews
A rent review clause specifies when the rent will be reviewed and may be adjusted – typically every 3-5 years – to ensure that the landlord continues to receive the ‘market rent’. The technical and legal process to establish the new rent will be specified in the least, with ‘upward only open market rent reviews’ being the most common.
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User
The ‘user’ clause relates to what the leased property is permitted to be used for and, importantly, whether there are any restrictions or limitations in place that could be a problem for your business. While you are doing your research, also double check that any and all necessary planning consents have been obtained.
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Repairing Obligations
Most new commercial leases are granted on a full repairing and insuring (FRI) basis, meaning it is the tenant’s responsibility to carry out repairs and pay for premises insurance. Every lease is different when it comes to specifying what exactly is meant by ‘repair’, and unsurprisingly this is one of the most hotly disputed elements of commercial leases.
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Dilapidations
Tenant responsibilities in terms of dilapidations, reinstatement and fittings & fixtures are critical to understand at the beginning of the lease, since you will be required to return the premises to a specified state of repair (e.g., its condition at the start of the lease term). Consult with a specialist dilapidations surveyor to understand and manage your obligations and dilapidations costs.
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Lease Term
The lease ‘term’ is the duration of your tenancy, which is usually negotiable. Typical leases can be 3-5 years long, but longer lease terms for up to 25 years are not at all unusual. The important thing is to ensure that the lease term suits your financial projections and business objectives in the short, medium and long term.
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Subletting and assigning
Are you able to sublet some or all of the property to another party, so that they become your de facto tenant? Are you able to reassign or transfer (i.e., sell on) a remaining lease term to another party? If so, are there any restrictions, or could you still be held responsible for rent and other commitments in case the incoming tenant doesn’t honour them? It’s a legal minefield that needs careful scrutiny.
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Alterations
Another potential minefield is the area of the tenant making alterations to the building. What structural/non-structural changes can you make and do you need the landlord’s formal consent by way of a Licence to Alter? Will you have to reverse the alterations at the end of the lease term as per your dilapidations obligations?
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Break Clauses
Many commercial leases include a break clause, giving the tenant the right to terminate the lease early, for whatever reason, by giving notice in writing at a specified time. The greater flexibility may be just what a growing business needs. However, if the landlord also has the right to break early, this can create unwelcome uncertainty for your business.
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Service Charges
Carefully check your obligations with regard to the upkeep and maintenance of any shared spaces or communal grounds. Most leases are ‘triple net’, meaning you pay rent, your share of property taxes and your share of Common Area Maintenance (CAM). There will also be an amount payable for Capital Expenditure (major building repairs, e.g., repairs to roof, foundation or HVAC installations),
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Personal Guarantee
While many landlords prefer individual business directors to provide an additional personal guarantee for their commercial lease, this is something that you can negotiate. Where possible, personal guarantees should be avoided or, at the very least, limited to a portion of the least term. Taking independent legal advice is highly recommended.
At Bradley-Mason, our team has a wealth of commercial property experience and can help both landlords and tenants with a range of Commercial Building Surveys, Building Consultancy, Access Consultancy, Schedules of Condition, Dilapidation Surveys and much more besides. With five offices throughout the UK, we are ideally placed to meet your needs, wherever you are based. Contact us for details.
DISCLAIMER: This article is for general information only and not intended as advice. Each project has its own set of unique circumstances, all potential issues should be investigated by a surveyor on a case by case basis before making any decision.