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July 24th 2020

Negotiating a commercial lease

Starting a new business can be a daunting prospect, with numerous issues to overcome in order to ensure the smooth transition from fledgling entity to a successful, profitable company. Taking your first commercial premises can be an integral part of this process, bringing its own challenges and obstacles. Taking commercial space is an exciting step for any business, but it’s unfortunately very easy to make mistakes that could cost the business dearly in the future. Not knowing how to negotiate a commercial lease is stressful for any business owner. However, with the right advice, entrepreneurs can avoid common pitfalls, securing a deal that’s right for their business, with appropriate safeguards necessary for an ambitious start-up. Scholes Chartered Accountants can point you in the right direction.

➢ Do your homework and avoid hasty decisions

The first goal is to identify the property that is right for your business – there is a whole host of criteria to consider, some more obvious than others. As well as location and sq. ft. it’s worth taking the time to speak to other occupiers about their experience.

➢ Negotiate a comprehensive set of terms

Once a property has been identified, an agent will assist in helping you negotiate a commercial lease. The negotiation of a set of “heads of terms” is imperative and is the opportunity for you to negotiate the best deal available. It’s vital that any requirements you have are factored in at this point – it will be more difficult to negotiate additional concessions once terms have been finalised and lawyers instructed.

➢ Consider which entity is to take the new lease.

The entity which takes the new lease will be “on the hook” for all the associated tenant liabilities, including payment of rent, the service charge and additional payments, plus any liabilities for dilapidations and such matters. You should also consider as to whether to take the lease in a newly incorporated limited company, rather than – in the case of a sole trader – your own name. This will avoid being held personally reliable for such obligations.

➢ Push for a rent-free period

Depending on the desirability of the property, levels of interest and current market trends, tenants are sometimes able to negotiate a rent-free period or associated rent incentive in lieu of the fact that they may need to fit out the property.

➢ Flexibility, termination and ability to ‘deal’

As a start-up entity, you may have no way of knowing in which direction your new business will go. You may find that the business grows rapidly and that you quickly require bigger premises to support such growth. Conversely, you may find that things do not go so well, and that you no longer require as much space, or you may even wish to terminate the letting in its entirety. As such it is important to retain as much flexibility as possible. It is advisable to try and negotiate a tenant-only break right at a specific point (for example, after three years of a five year lease term) or better still, a rolling break right, which gives you the ability to terminate at any time after a given date.

➢ Consider repairing liabilities and protect against onerous obligations

You need to be sure that you are not signing up to a lease with an overly onerous repairing liability. To protect against this, it is important, where a property is not in full repair, that you always seek to agree a schedule of condition to be attached to the lease. This shows the state of repair of the property at the date you take your lease, with an associated lease clause, meaning you’re only obliged to put the property back into the state of repair as evidenced by the schedule.

➢ Consider reinstatement when making alterations

Typically, commercial leases allow tenants to make internal non-structural alterations with the landlord’s consent, and often allow the erection of internal partitioning without the need to obtain consent at all. It is important to ensure that where fit-out works are required in order to operate from the premises, the landlord's consent is obtained as part of the initial transaction and that you don’t end up picking up the tab for the landlord’s legal costs in preparing a licence to document such consent.

➢ Seek to agree a cap on additional charges

If, for example, you are taking a lease of a multi-let building, there will likely be common areas and you will in all likelihood be required to contribute toward the cost of maintenance/ insurance of the same. Where possible it is advisable to try and cap such contributions at a fixed price, so that you know your liability cannot go above that figure.

➢ Be aware of LBTT and additional post completion costs.

Depending on the length of term and annual rent you agree for the property, it is possible that the lease will generate LBTT. In addition, your lease may require registration at the Land Registry for which there is a registration fee payable. As such, it is important that you take advice as to such liabilities in order that you can factor them in when working out your costings.

➢ Take professional advice

The above points provide a broad flavour of the sort of issues that need to be considered when you want to negotiate a commercial lease. I would always recommend that you instruct a reputable commercial solicitor who will ensure that these points (and more) are picked up during the negotiation process and that your interests are properly protected.

if you'd like to discuss any of the points raised in this article, please feel welcome to contact us.

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