There is a lot to think about if you are going to let out your commercial premises to a new tenant; here are my seven top tips to help get you started:
1. Third party consent
You should check at the outset whether you are going to need any third party consents before you complete the lease.
This could be consent from a lender if you have a mortgage over the property, consent from a superior landlord if you own a leasehold interest in the property (you may also have to pay their legal/surveyors fees, so budget for this!), or consent from a management company.
These are things that can often delay the process and cause a frustration for the landlord.
A solicitor should be able to tell you pretty quickly if a third party consent is required.
2. Security of tenure
If you don’t deal with the security of tenure provisions in the Landlord and Tenant Act 1954 (“the Act”) within the lease, then the default provision is that the tenant will have the protection of the Act and therefore the Lease won’t automatically come to an end at the end of the term.
If you want the lease to automatically come to an end, and want to avoid tenant lease renewal rights, then the Landlord and Tenant can agree to “contract out” of the Act.
Contracting out is a statutory procedure and must be followed closely, so we would always recommend taking professional advice.
Landlords need to consider the current state of repair of the property, and the condition they want the property to be in at the end of the Lease.
The extent of the property you are proposing to let to the tenant is important in this context. If you are letting an “internal only demise”, then the tenant won’t generally be responsible for repairing any structural issues (although a tenant might have to contribute to such things through a service charge).
A tenant may also want to ensure that they don’t have to put the property in any better condition that it is at the start of the lease. In this case the parties may agree a schedule of condition, showing the state of the property at the start of the lease (often largely photographic). In this case, the lease will usually say the property is to be kept in no worse state that as documented in such a schedule of condition.
4. Quality of the tenant
A very important point to consider is the “quality” of your new tenant. This is because if the tenant defaults on the rent or any other covenant in the lease, then you want to be in the best possible position to recover any monies due.
If the proposed tenant is a limited company you should check that they own some assets, otherwise it may be worth asking one of the directors/shareholders to provide a personal guarantee for the tenant covenants in the lease.
If the tenant is an individual or a company you might want to consider asking for a rent deposit.
5. Professional advice on the level of rent
We would always recommend you speak to an agent/surveyor to get an accurate view on the correct market rent for your property.
The agent/surveyor will be able to compare the rent on your property with other similar properties in the area to ensure you’re not being short changed.
It may be that you offer the tenant a lower rent for the first couple of years (for example if they are a new business just setting up and can’t afford the full rent at the moment), and then include a rent review (to a fixed amount or with open market or RPI increases) later in the term. Most market rent leases have some sort of rent review every 3, 4 or 5 years.
6. Your future intentions with the property
Whilst you may be happy with a basic or informal lease (maybe you know the tenant well already and don’t want to go to the expense of a having a proper lease drafted), it is important to consider how a potential buyer or bank might view this.
You may decide to sell the property with the benefit of the lease in place and the seller will want to ensure the lease is an enforceable document on standard commercial terms.
If you decide to later take out a mortgage on the property, then your potential lender will certainly want a formal lease to be in place.
7. Legal Advice
We would always recommend taking out legal advice when entering into a new lease, whether you are going to be the landlord or the tenant. A lease is an important legal document that can take effect for a long time, so you should make sure that you are properly advised!
If you would like any advice or assistance in relation to commercial leases, please contact one of Burnetts’ Commercial Property lawyers here.