Taking a new lease of commercial premises – A tenant’s guide

Tenants often think of commercial leases as ‘standard’ documents.

In reality, this can be a dangerous view and not taking appropriate advice can leave you with complications and cost that could seriously affect the safe and profitable running of your business in the future.

A brief outline of the process of negotiating and taking a new lease follows.

  1. Agree Heads of Terms

For bigger commercial transactions it is usual to have two commercial agents, one for the Landlord and one for the tenant. They will agree upon Heads of Terms which are used to draft the lease.

For small businesses there is usually only one, or no commercial agent. It is therefore essential to obtain early advice on the proposed heads of terms. Often tenants come to us after the (more experienced) Landlord has already persuaded them to accept terms and they find it difficult to renegotiate at that stage. Each side normally bears their own legal costs but the Landlord may ask you to pay theirs.

Typical basic terms which need to be agreed upon are:Questions to ask:
Who is the tenant?Will this be you personally or a limited company/pension trustees? Does a company need to be set up?
PremiumAre you agreeing to pay a premium for the lease, as well as rent? Is Stamp Duty Land Tax payable upon it?
Term of the lease (ie how long it is)You will be liable for the whole of the cost of the rent during the terms of the lease. Can you afford this? If not, consider a break clause. How desirable are the premises likely to be to other tenants if you need to leave the premises for any reason? Will the term be attractive to them?

 

Leases over 7 years have to be registered at the Land Registry.

Assignment or TransferIn what circumstances can you assign the lease? You are likely to remain liable for the actions of the future tenant and it is important that you understand the precise provisions of the lease in this regard as part of your business planning.
Landlord and Tenant Act 1954 Security of TenureThe consequences of the law in this area cannot be overstated. You will automatically have the right to a new lease on similar terms as the existing one at the end of its term unless you agree to contract out of the Act. The Landlord may require you to contract out. You need to consider this in light of the rent provisions and your future plans for your business, including whether any goodwill is likely to attach to the premises.
Rent payable

 

 

Is there any rent free period to allow fitting out? Is the rent a fixed sum throughout the whole of the term or is a stepped rent included? The final rent at the end of the lease term will of course be used for possible renewal negotiation purposes. More complicated rent formulas can be used including ‘turnover rent’ which links to the turnover of the business.
Rent reviewsHow often will the rent be reviewed? You will want to make sure that reviews are not too frequent due to the possible cost if you cannot agree with the landlord.  Currently we recommend no more than every three and preferably five years due to the slowdown in the commercial market following the most recent recession. Reviews are usually ‘upwards only’.
Whether there are to be any break clauses

 

 

As mentioned above, if your business fails, you will be liable for the rent unless you can assign this to someone readily. A break clause allows you to get out of the lease at specified times during the term. The terms of any break clause need to be considered very carefully as any technical non-compliance can invalidate a break notice with disastrous consequences.
Repair covenantsWill you be responsible for the structure of the building or just the interior of the premises? You might need to consider what other premises there are in the building and their contributions towards this. You may want a schedule of conditions attached to evidence the state of repair when you took the lease on and to limit your repair liability so that you don’t have to put it into any better condition.
AlterationsAre there any proposed alterations necessary to the premises and for which the Landlord must consent? e.g. installing signage or electrical work. If so, it is best to include these in the lease. You may also need to apply for planning permission and building regulations.
Permitted Use ClauseThe wider this is drafted, the more expensive the rent is likely to be. However, if the use is too restrictive, it may prevent you from being able to easily assign it to another tenant during the term, if required.
Personal GuaranteesThe Landlord may insist on you guaranteeing the lease where it is to be taken in the name of your company.
Rent Deposit DeedWill the Landlord require you to pay a sum in advance to be held by him in case you fall into arrears? If so, how much? These are usually linked to the equivalent of say 3 or 6 months rent and will need to be topped up if the rent increases at rent review time.
  1. 2. Decide on what type of lease

It may be appropriate to have a bespoke lease with complex provisions but sometimes a Law Society Business Lease (with appropriate amendments) will do. The latter is cheaper and often quicker.

Finances can be tight for small businesses and sometimes they do not agree upon a formal lease, but rather take occupation and start paying rent on an informal basis. In those circumstances, problems can arise if there is a later dispute as to its terms. We advise against taking occupation without a formal document in place. A ‘tenancy at will’ can be granted quickly to allow time to negotiate over lease terms if necessary.

A Plan may need to be drafted to attach to the lease. If it is registrable at the Land Registry, they have specific requirements for the plan and special clauses that are mandatory for the lease, known as ‘Prescribed Clauses’, summarising its contents. The Land Registry will not accept the lease without these.

  1. Draft the Lease/approve the Landlord’s draft

There are a number of clauses which need to be checked (some of which are mentioned above), reported to you and if necessary, negotiated in light of your circumstances. Understanding you and your business is key to providing the correct advice.

You may wish to have a survey and prepare a schedule of conditions.

  1. Raise Searches/Due diligence enquiries

It is rarely not appropriate to have a Local Authority Search and to make enquiries to confirm the permitted use of the premises. In some cases, planning permission may need to be sought for change of use. You may also be liable for environmental contamination issues and a desktop search is advisable.

We also look into the following:

  • Energy Performance Certificates – Required for most commercial properties and as of April 2018 need to be of a rating of ‘E’ or above.
  • Asbestos Regulations compliance – The Landlord should provide a survey for appropriate properties.
  • Fire Risk assessment – A plan should be handed over or you will need to make one.
  • Health and Safety file – This should be handed over for the property

There are a standard set of commercial enquiries known as “CPSE’s”, to which we will request replies from the landlord on your behalf. They deal with important matters such as capital allowances and whether VAT is payable on the purchase price. If so, you will need to be registered for VAT purposes to reclaim this on any sums payable under the lease. It is your obligation to carry out all necessary and prudent searches and investigations before committing yourself to the obligations under a lease. You will have no later recourse against the Landlord if you do not.

  1. Complete the Lease

Once all terms have been agreed, the solicitors can proceed to complete the lease and the keys will be handed over to you. You will be required to pay any rent, deposit and other sums in advance.

If the lease is contracted out of the Landlord and Tenant Act, completion must be two weeks after a statutory notice is served by the Landlord, failing which the tenant must see an independent solicitor to swear a declaration that they have received and understood the rights they are giving away. Depending on the term of the lease and the rent/any premium payable, there may be Stamp Duty Land Tax to pay and it might be registrable at the Land Registry which we deal with on your behalf. There may be further tax payable if the rent increases during its term and we can assist with this at rent review time.

If you take occupation before the lease is completed (which we do not advise), a Stamp Duty Land Tax liability may arise at that date and you will be liable to pay any tax within 30 days to avoid penalties from HMRC. You will also jeopardise your bargaining position on any final issues being dealt with between us and the Landlord’s solicitor.

Date: February 2017

Important Note: The above information is for general guidance and in part forms the opinion of the author. It is based on the law as at the date of this note. It should not be relied upon in part or in whole as a substitute for independent legal advice.  If any of the issues raised in this article affect you please contact a member of our team for advice on your precise circumstances.