Commercial tenants – essential information

Your premises are or may become a key part of your business. As your business expands and takes on a new venture these are some of the key areas on which you should take legal advice before you commit yourself.

Heads of terms

It’s important to clarify and agree the main terms of the lease with the landlord before you are given a draft lease. Try to formulate a ‘Heads of Terms Agreement’. Although generally not legally binding, if carefully prepared, this will save time when negotiating the lease document.

The length of the lease and early termination

You should seek to ensure that the lease gives you some flexibility if you outgrow the premises or if you need to end the lease early. You could do this by:

– agreeing a shorter term

– negotiating a longer term with a break clause enabling you to end the lease part way through the term.

Transfer of the lease

You should have the right to transfer the lease to another tenant. Most landlords will require you to guarantee the new tenant’s obligation to pay the rent under the lease. If the new tenant defaults, the landlord could require you to:

– pay rent and other expenditure for the remainder of the lease.

– If the tenant is declared bankrupt or is wound up, take the lease back for the remainder of the term.

Similarly, you might seek to ensure that you can sublet the whole or part of the premises to give you more flexibility.

Rent

Try to agree an initial rent free period. This could be helpful if you are just starting out in business or need some time to fit-out the premises.

Rent is usually paid quarterly in advance, but this can sometimes cause cash flow difficulties. If so, ask if rent can be paid monthly in advance.

VAT

Many rents under commercial leases attract VAT. This may be a problem if you are not VAT registered and you cannot claim the VAT back.

Rent Reviews

In a longer lease of 3 to 5 years or more, the lease may allow the landlord to put the rent up part way through the term.

Reviews are usually “upwards only” but on rare occasion it is possible to negotiate a review in line with the market rental of comparable local premises which could result in a rent reduction.

Personal Guarantees and Rent Deposits

Some landlords seek personal guarantees from directors of tenant limited companies. This defeats the object of limited liability so avoid them unless you have no other option.

You could offer a rent deposit instead. These are often at least one quarter’s rent. The rent deposit should be held in a separate rent deposit account to protect the money in case the landlord goes bust!

Repair

This is very important provision. Almost all leases require the tenant to keep the rented property in good or even better repair. This can also have the effect of requiring you to put the property into repair. If the property is old and in a poor state of repair you could face a big repair bill because the lease will require you to hand back the property in accordance with its terms. Even new or recently refurbished properties can cause problems as they may come with “inherent defects” resulting from poor design or construction methods which may require repairs in the future.

A “photographic schedule” attached to the lease noting the state of repair of the property at the beginning of the lease will help to protect you. Dilapidations clauses for repairs at the end of the lease can be very expensive, and agreeing that you will not be required to put the property into any better state of repair than at the start of the lease as evidenced by the schedule will reduce that liability.

If you are leasing part of a building and are only responsible for part of the repairs, make sure that the landlord is required to repair parts of the building not covered under yours or any other lease. For example, you may not be required to repair the roof but you still need to be able to insist upon the landlord doing so.

Service Charge

A lease of part of a building or a of unit on an estate will often include a service charge to cover the landlords costs incurred in maintenance and repairs to the rest of the building, roads, common areas, cleaning, security and so on.

Check what proportion of the entire service charge will apply to the property you are leasing and how this is calculated to ensure it is fair. Try to negotiate a “cap” to the service charge so you are not faced with a large bill if the landlord needs to undertake substantial repairs to the building during your lease.

Security of Tenure

All commercial leases over 6 months in length are normally protected under the provisions of the Landlord and Tenant Act 1954 which provides that you will not automatically have to leave at the end of the lease unless the landlord serves a notice establishing one of a number of grounds.

The Act also allows you to ask the court to decide the rent under a new lease the landlord offers you if you cannot agree the same. The landlord can seek to exclude that protection but if the location of the premises or continuity of occupation is key to your business, it could be very important to have it in place.

Stamp Duty Land Tax

The longer the term of the lease and the higher the rent, the more likely you are to have to pay Stamp Duty Land Tax on the lease. It is worked out on the total rent paid during the term (plus any VAT)

Any amount over £150,000 (subject to a calculation to arrive at what is called a Net Present Value) will attract Stamp Duty at 1%.

Negotiate the most efficient length of term to avoid paying SDLT or seek to reduce the rent slightly if you are just over the threshold.

Registration of the lease at the Land Registry

If the term of the lease is over 7 years, it will have to be registered at the Land Registry with a properly prepared scale plan.

We have many years of detailed experience in negotiating commercial leases, so do please contact us if you are considering taking on a new lease or sublease, assigning an existing lease or taking on an assignment of an existing lease. We can help you minimise the risks.

If you have any questions or require further advice, please contact:

David Hall, 01789 772955 / email@hallreynolds.co.uk

 

The information, materials and opinions contained on this website are for general information purposes only, are not intended to constitute specific legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Hall Reynolds LLP does not accept any responsibility for any loss which may arise from reliance on information or materials published on this website