Taking a lease of commercial property for the first time?

Typical commercial leases can be long and off-putting. However, it the ‘small print’ can be crucial to your business, both during the term and when you leave the premises. It is also important to appreciate that most leases are drafted with the interests of the landlord (or ‘lessor’) uppermost in mind, although the precise terms of a new lease may be negotiable.

A lease gives you, the tenant, a right to exclusive possession of premises for a defined period of time. This is referred to as the ‘term’.

Your commercial lease  will contain contractual obligations on you and your landlord in connection with your use and occupation of those premises. These obligations are referred to as ‘covenants’. It is important that you are aware of all covenants when entering into a new lease or taking a transfer (referred to as an ‘assignment’) of an existing lease before you sign on the dotted line.

Heads of terms

For new leases, in most cases your landlord or its agents will issue heads of terms setting out the main terms of the arrangement, before legal costs are incurred. It is important that you seek legal advice at this stage as you will need to be confident that the terms offered by the landlord suit your business - and your budget. This may be the optimum time to negotiate over the proposed terms and could save you time and money in the long run.

Your budget

You will need to be confident that you can afford your chosen premises. This means finding out as much information about the financial liabilities under the lease as soon as possible.

Key issues are:

• Rent - What is the level of annual rent?  Is there to be a rent free period, for example as an incentive to you for taking on the lease or to cover a period of fit-out?  Can the rent be negotiated down or the incentives improved? Is VAT payable on the rent?  When is it payable – normally this will be quarterly in advance which can be a significant cashflow burden for the tenant?

• Rent review - Depending on the length of the term it is likely that the landlord will want the rent to be reviewed periodically. For example, if you were taking on a new 10-year lease, the lease may provide for the rent to be reviewed every five years.

You need to find out how the rent is reviewed. Is it by agreeing fixed amounts, perhaps index-linked, by reference to market value or something else?  Does this suit your situation?  Can this be negotiated?

It is important to note however that in almost all cases the rent review will only ever go up, and at best it will stay the same.

• Rent Deposit – Does the landlord seek a rental deposit (typically 3 or 6 months’ rent) and if so, on what terms?   If there is to be a deposit, this should normally be recorded for your protection in a separate Rental Deposit Deed which may, for example, provided for it to be returned after a certain period of time as well as for interest to be credited to the tenant.

• Service charges - If you are taking a lease of part of a property, the landlord will be responsible for maintenance of the ‘common parts’, such as shared facilities, driveways and pathways, the external and structural parts of the building, and insurance of the building, subject to a contribution from you.

What are the service charge costs and what proportion will you be obliged to pay?  Is it a fair proportion according to your proposed use?  For example, you do not want to have to contribute towards the capital costs of replacing a lift if you are on the ground floor!

• Stamp duty land tax – this is a tax on property transactions. There is a complex formula for calculating the liability based on the level of rent and the lease term. You will need to ask us to calculate if any liability will be due as this tax will be payable on completion of the lease.

• Land Registry fees - If the term of your lease is more than seven years it will need to be registered at the Land Registry. We will deal with this on your behalf but it means paying a Land Registry fee, which is determined by reference to the value of rent, on completion.

The premises

• Repairing obligations - As mentioned above, if you are taking a lease of part of the property the landlord will normally take on the responsibility for exterior and structural parts leaving you responsible for the interior and non-structural parts.   (However, be sure to check whether the landlord seeks to recover a contribution towards the cost of structural repairs via the service charge).   If you are taking a lease of the whole property, you will most likely be responsible to maintain and insure everything.

It is  important therefore that you inspect the premises to establish what condition they are in. If you have concerns, in particular where you have responsibility for structural parts, you should arrange a survey. 

You may in some situations be able to agree with the landlord a schedule of condition; to limit your repairing obligations to the condition of the premises at the date of the lease so that the landlord cannot require you to return them in any better condition at the end of the lease.    Such arrangements can prove critically important when you come to leave or dispose of the premises as the cost of putting commercial premises into the state of repair and condition required by the lease is frequently substantial.  This issue of ‘dilapidations’  can be a nasty sting in the tail and provides a regular source of disputes when leases come to an end.

• Use -  Has the landlord consented to your required use? Do the premises have the correct planning consent for your intended use? If not you will need to consider either asking the landlord to apply for the relevant consent, or making the application yourself. Your solicitor will also need to check that the use is not restricted in the landlord’s title, as this is separate from the lease terms and planning conditions.

Staying in the premises – your ‘security of tenure’

Is your lease protected under the security of tenure provisions of the Landlord and Tenant Act 1954 or does the landlord want that protection to be “contracted out”?   Will you have the right to a new lease at the end of the term of your lease?  This is important if you have established your business and you want assurances that the landlord cannot require you to vacate at the end of the term.

The issue of security of tenure is often associated with considerations regarding the length of the lease, the level of rent and the extent of repairing obligations.  Thus, if a lease is to be contracted out of the 1954 Act  so that there is no security in the form of a right to renew,  you could expect the level of commitment from you in terms of minimum duration of lease and repairing obligations to be less;  on the other hand you may also find the rent level for an ‘internal repairs only’ lease higher than would be the case if you are taking on potentially significant repairing obligations.

Disposing of the premises

Similarly if your business grows, or reduces you will want to know that there are adequate provisions in the lease to enable you to assign it or to sublet it. Landlords often impose conditions in both situations and you will want to make sure the lease terms are as flexible as possible.

May 2016

Our key contact at DMP for further advice and assistance on commercial leases is:

Bill Montague, partner                                
bill.montague@dextermontague.co.uk        
direct dial:    0118 960 5786                          
main office:  0118 939 3999                    

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.