You’ve found the ideal commercial unit, now check the paperwork and small print. The devil is in the detail. Take time to understand what you are signing.
If you are thinking of leasing a commercial property there a number of pitfalls to be avoided. The following is a brief but far from comprehensive guide as to what to look out for, but most importantly use a solicitor that specialises in commercial leases, not a solicitor that does it part time, you need specialist advice, it is no small undertaking to take on a lease and should not be entered into lightly.
Term – the lease term is the length of years you sign up to. Think carefully about this. Are you likely to outgrow the unit? If so build in some flexibility with a shorter lease or break clause.
Rent – make sure the rent is affordable. Check if it is to be paid monthly or quarterly in advance. Often VAT will be in addition which you can re-claim if registered for VAT. Check the rent is at a market level, by comparing the unit to similar ones in the locality.
Agent’s advice – you should think about employing a commercial property agent to advise you on the rent and other lease terms. This could save you money, because once solicitors are instructed, whilst a solicitor should prevent you signing up to something that would be catastrophic, the commercial element of the deal is already agreed at that stage, therefore it’s very difficult to go back and re-negotiate. You should be comfortable with the deal before solicitors are instructed.
Break Clauses – as referred to above, these provide flexibility. Be aware and avoid condition precedent breaks, whereby the tenant has to comply with lots of conditions for the break to be valid. Often this is difficult to do. Make sure the notice period is reasonable and always get a solicitor to serve the break notice on the landlord. Landlord’s breaks are to be avoided if possible and these can only legally apply if the lease is outside The Act – see later.
Security of Tenure – you need to be very careful as to whether your lease is inside or outside the security of tenure provisions of the Landlord and Tenant Act 1954 (The Act). If inside you have formal rights to renew, except in exceptional circumstances (which your solicitor will advise on), but if outside The Act you will have no rights to a new lease whatsoever. In practice this means that a landlord can simply change the locks on lease expiry and you would have no rights to a new lease. You will also have no negotiating power in agreeing the terms of a new lease, the landlord can dictate or ask you to vacate. So if outside The Act it is essential to agree a new lease well in advance of the old lease expiring, and this needs to be formally documented via a solicitor, not just an email or hand shake. General advice is if possible make sure your lease is inside The Act.
However bear in mind many landlords will insist that short, flexible leases are outside The Act, so this is not unusual, but you need to be aware of the implications.
Repairs – most leases are full repairing, which means the tenant is responsible for all repairs and dilapidations at lease expiry. On second hand units you should insist on a schedule of condition limiting your repairing obligations to the standard of the unit when you took it on. Your own surveyor should prepare this and at the same time ask your surveyor to check if he/she has any concerns over the condition of the property and how it may deteriorate over the term of the lease. For example a schedule of condition will identify a poor roof, but that’s not much use if it continually leaks and the landlord is under no obligation to maintain it. Also remember that schedules of condition do not usually cover redecoration, which can be very expensive, eg painting of steel frames in warehouses. Sometimes it may be appropriate to exclude items from the tenant’s repairing or decorating liability. A good building surveyor will advise. Always use a specialist building surveyor to advise on dilapidations when your lease is coming to an end and you intend to vacate.
Rent reviews – many shorter leases no longer have reviews, but where they do exist the rent review clause will need to be carefully checked, ideally by your agent and solicitor. They are usually upwards only.
Tenant/Guarantor – think carefully as to who will sign the lease and potentially guarantee it. Do you want to put your house on the line? If not don’t sign anything in your personal name, always use a Ltd company or LLP. If the landlord insists on a further guarantor, consider a rent deposit rather than a personal guarantee.
Business Rates – be careful to properly check out what rates are payable. Anything with a rateable value of £12,000 or less gets 100% rates relief presently, if it’s your only business premises. Between £12,001 and £15,000 there is a sliding scale. Above £15,000 full rates are payable subject to the national multiplier. All the above is subject to change and should be carefully checked and understood. Again your surveyor/agent will be able to assist.
Rent free periods – these really are by negotiation and depend upon the term of lease the tenant is prepared to commit to, the demand for the unit, and the quality of the tenant covenant. You should always ask for a rent free, but you may not always get one. Again a local agent will be able to assist.
Letting agents – remember they are acting for the landlord and no matter how friendly and helpful they appear, they have no particular duty of care to an ingoing tenant That is why you should take your own professional advice.
Building Insurance – usually the landlord insures and the tenant pays the premium. Always check the amount. You will need your own contents insurance/public liability insurance etc…
Service Charges – some units are subject to a service charge. Check what this relates to, what the amount payable has been for the preceding three years, if there is any cap on it, if you could be saddled with a major item such as replacement of all the air con in a multi let office unit etc. It is essential you take advice from a solicitor and ideally an agent in all situations involving a service charge.
Alterations – be aware that most alterations will require landlord’s consent and it is essential this is obtained. If you know of an important alteration in advance, always get this approved as part of the initial legal documentation. Again solicitors/surveyors’ advice is essential.
Dealings – this means the ability to assign or sub let your lease. You will need to check this carefully.
User clause – make sure the user clause allows some flexibility. You may need to underlet to another company who does something different to your own.
Types of leases – they can vary from a few pages to 50+. Always take advice even if only a short lease or licence.
Mark Brown MRICS
Director TDB Real Estate
Tel: 01604 604 020
Mob: 07730 416 964
Email: mark@tdbre.co.uk
This advice is for guidance only. Landlords and tenants should seek their own professional advice.