Tips for negotiating a commercial lease
Usually a landlord will want to secure a tenant for the longest possible period. Tenant rights to break the lease will reduce this period.
Landlords should consider the financial strength of the tenant and whether any guarantors should be provided or a rent deposit obtained. This due diligence exercise is best carried out before any heads of terms are agreed.
Some other key areas to remember:
- Repairing obligations – this may depend on the property type but generally speaking a full and unlimited repairing obligation should be sought if possible.
- Service charges – whether the property will be subject to a service charge (often for costs incurred by the landlord relating to the communal areas or structural parts).
- Alienation – will the tenant be allowed to transfer, underlet or share occupation of the property and if so, what are the conditions for consent to be given?
- Associated rights – the tenant may, for example, require ancillary parking rights and the landlord might need to consider the availability of such space.
Alterations – the tenant may wish to alter the property and consideration should be given to what is going to be acceptable. Some major alterations may leave the property unappealing to future tenants and an obligation to remove and reinstate is often recommended.
A tenant should consider very carefully the extent of potential obligations in light of the length of the term of the lease. A longer lease may, for example, place more substantial repairing obligations on the tenant whilst with a shorter lease a tenant may understandably limit some obligations. The key is to ensure the extent of a tenant’s obligations are reasonable and proportionate to the benefit being obtained by the tenant.
Whilst it will also depend on the property type and other factors, in general a careful tenant should consider the following:
- Identity of the tenant – tenants should consider whether they want to take a lease in personal names or whether a corporate entity is more appropriate.
- Permitted Use – the lease should allow the tenant’s intended purpose and checks should also be carried out with the local planning authority to confirm that use is authorised.
- Term – ideally the length of the term will align with the tenant’s business plan and build in flexibility to break the lease early, if necessary. Options to extend the lease or including security of tenure rights can also offer better long-term security.
- Payments – there is more to consider than just the rent. Tenants should understand the value of other payments such as service charges, buildings insurance and business rates.
- Repair – tenants need to be careful when accepting a full repairing obligation. A building survey should usually be carried out to understand the existing condition of the property. Sometimes it may be necessary to ask for a limited repair obligation by reference to a schedule of condition, or by excluding certain problem areas.
- Alterations – if the tenant wants to make changes to the property then early consideration should be given to those plans and whether the property is suitable. It is likely that consent will be needed from the landlord and also planning or building regulations consent may be required.
- Rent Review – advice should be sought to ensure that any rent review mechanisms are appropriate to the lease type and not more often or onerous than what is typical in the market.
- Alienation – consent is usually required before assigning or subletting and there are often stringent conditions which must first be met. Tenants should check these conditions are not overly restrictive and consider whether they may want to share occupation with group companies.