Six Things You Need To Know Before Renting A Commercial Property
Renting commercial space can be complicated. Sure, it’s much the same as with a residential property. There’s rent to pay, general running costs to consider and provisions in your lease agreement to protect you and your landlord.
However, a commercial lease or agreement can often contain over 50 pages of detailed provisions, many of which may affect your bottom line. So, you do need to read it and understand what it means. However, don’t assume because it’s a formal document that it must be right. It is exciting, but it’s a big step, and you need to make sure you’re adequately protecting yourself. Even large organisations who have previously moved premises will still seek professional advice.
Naturally, each case is different, and your leverage will affect how much you can negotiate terms. But, as with most contracts, being forewarned is forearmed.
Six things you should know:
Allow enough time at the outset . Once you have identified a property, it may take months before you agree to a lease. Make sure you are clear about the date you want to move in and whether there’s any flexibility. Both parties will need to protect their interests, and there’s likely to be some to-ing and fro-ing. A simple lease is expected to take around a month.
Is the building a good fit for your business? It’s essential to look at what rights you will be granted in the lease. In addition to rent, tenants are often also responsible for service charges, business rates and utilities. If you are expected to cover this cost, check out the building’s efficiency rating and whether the Landlord has covered their MEES obligations It could be that improvements need to be made to the building which may affect the running costs. Ensure the lease sets out what rules apply to the facility in general, such as communal space or allocated parking, loading bay or delivery restrictions. Permitted use is vital. All commercial leases stipulate a permitted use for the term of the lease. Naturally, a broader permitted use is preferable. So, before you sign up, you should check with the planning authority that the designated use of the building does not conflict with your intended use. If it does, you may need to apply for planning permission for ‘change of use’.
What is the ‘term’, and can you extend it? The term of the lease is critical. The cost of the lease may be attractive, but it may not be sensible to be burdened with a long lease when your plans are not sure. A break option can be considered. Equally, you may want to have the ‘option’ to extend your lease, especially if you have spent hard-earned cash on an expensive fit-out. Finally, you need to be sure that the lease does not exclude your rights under the 1954 Landlord and Tenant Act. You may run the risk of being unable to renew your lease when the current one expires.
Negotiating rent, review clauses and obligations When dealing with the rent, your principal object will be to rent the space for the best price possible. Commercial space is almost always priced per square foot. Understandably, landlords are often reluctant to discount, but you may be able to agree on some months of ‘free rent’. Although rent-free periods usually kick in at the start of the lease (common during a fit-out period or as an incentive), you might find them at other points during the lease term. In addition, there may be a VAT advantage for the Landlord, and it may help in situations where landlords need to report a specific price per sq ft for their investor/bank. As far as rent review clauses are concerned, the devil is in the detail. By law, the rent can’t go up more than once every 12 months, and the Landlord must always notify the tenant of any increase. However, your lease may include rent review provisions, and you should make sure you understand how the review will affect the rent. Commonly used methods are:
Upwards Only Review: this either stays the same or increases in line with market rent. Not always easy to predict;
Retail Price Index Review: this is linked to inflation, possibly easier to judge;
Stepped Rent Increase: this will increase by a set amount on specific dates. Depending on your business there will be advantages and disadvantages for each. Finally, you should be sure you understand the rent obligations in your lease. Interest for late payment of rent is relatively standard but, once again, check the fine print. If you fail to pay on time, you may give your landlord the right to end your lease early. Known as ‘forfeiture’, the Landlord can change the locks when rent is unpaid.
Be careful: your landlord may not need to go to court and can often act after seven days.
Who makes good or repairs the building? Usually, a commercial lease will require you to keep the property fully repaired and in a proper state of decoration. Note: this may still apply even if you first occupied the property in poor condition. Consequently, you should always inspect the property thoroughly before you commit. Instructing a surveyor to examine the property before entering into a lease and raising any concerns with the Landlord is likely to save you money. Commissioning a pre-lease survey will identify dry rot and damp issues and save you from incurring repair costs unnecessarily. At the end of a lease, the tenant must return the property premises to their original condition. This process, known as ‘dilapidations’ is usually stipulated in the lease and is likely to involve removing fixtures and repairing any damage. A lease will usually allow for ‘Fair wear and tear’, and as such, tenants will be liability-free. To avoid issues further down the line, we would recommend, from the outset, that the Landlord agrees to the repairing covenant to be limited by a schedule of condition. This detailed document would then be added to the lease, showing the state of repair when you take the lease and set the expectation of how the property needs to be returned.
When can I serve notice? A ‘break clause’ is usually agreed upon by the tenant and Landlord at the outset and is a clause in your lease which allows you to bring your lease to an end early. There are usually a series of conditions that need to be met before a break clause can be exercised. These will need to be strictly adhered to. Otherwise, you will be obliged to continue with the lease. Make sure you check these conditions carefully and add any key dates/deadlines to your diary so you can properly exercise the break if/when you want to. Again, a building surveyor can advise you on break conditions and the works required to achieve a break.
Undoubtedly, crossing the t’s and dotting the i’s will stand you in good stead. However, even if you’ve agreed on the terms of your lease in principle, our advice would be to speak to the experts early – be they lawyers, building surveyors or both. That way, you will protect your business well, leaving time to focus on what you do best of all, running your business.
For further advice on dilapidations or related matters, please contact us. We’re here to help.
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