Top 5 Tips for Commercial Tenants
For many tenants taking a commercial lease is unchartered territory. So, as a tenant, what should you look out for? Commercial Property Solicitor Helen Hayward lists 5 things to get you started...
If you don’t know what you are looking out for, negotiating the heads of terms of your lease can be a minefield, and mistakes can leave expensive legacies. Paying for the right professional advice from a solicitor at the outset when terms are being negotiated can really pay off.
Repair liability – watch out for this one. I have put it at the top because it is one which often gets missed. Tenants don’t always realise that if you accept a full repairing lease term then you may be responsible, not only for keeping the property in good repair, but putting it in good repair regardless of the state the landlord handed it over to you in. This can be very onerous if you take on a lease of the whole of a building (the service media, heating and plumbing, walls, roof, foundations) which is in poor repair. Not matter how low the rent, you could be paying huge sums at the end of the lease to satisfy your repair obligation.
As a tenant you need to think carefully about the extent of the property you are letting, what the repair obligation is and the current state of repair of the property. You may want to consider qualifying the repair obligation with reference to a schedule of condition, or by excluding certain items; or if it is a new property consider if you need warranties from the builder or professionals involved in its construction.
Term and Break Clauses – it is an obvious one, but are you happy with the term? Is it long enough for the capital expenditure for the expensive fit out? Is it too long? Do you know what your business needs will be in 5 or 10 years’ time? Probably not with any certainty, so do you need to try and keep things as flexible as possible?
Should you be asking for a break clause? Most landlords will expect a break clause at least every 5 years. You may not think you need one now but always ask! A break clause is a valuable right on many levels – for you and if you ever want to assign the lease. Oh and watch out for break rights which have onerous conditions….an article in itself.
While we are talking about term it might be useful to consider that leases over 7 years need to be registered at the Land Registry and this can increase your costs. And don’t forget about Stamp Duty Land Tax – yes unfortunately this is payable on leases too (on the rent and any VAT payable) and the amount payable will be affected by the term. HMRC has an easy to use calculator on their website for you to check out potential liability.
Security of Tenure – the default position for a commercial lease is that the lease will not come to the end on the date stated in the lease. The tenant has the right to renew the lease at the end of the term following a process set out by statute and subject to the limitations set out in statute. If you are being asked to agree that a lease is “contracted out of the Landlord and Tenant 1954 Act” then you will be losing those rights. To agree this, you need to fully understand the implications.
Rent Reviews – you should expect a rent review at least every 5 years and maybe more frequently in a shorter lease. Unfortunately for tenants rent very rarely is allowed to go down! Rent reviews are pretty much always “upwards only”. Rent can be reviewed by a fixed increase or by reference to an index (RPI or CPI being the most common) or, as it probably most common, to an open market rent.
Alienation – this means how easily can you assign and/or sublet the lease. This is so important to, again, retain flexibility. In the absence of a break clause this might be your only get out. And perhaps you might want to sell your business one day? In which case you want to be sure you can pass on the premises to any purchaser.
But that’s NOT all folks! These top tips are far from exhaustive. So please make sure you get some professional advice before you agree heads of terms. I promise you that you will be happy that you did.
About the author
Helen is a Partner in the Commercial Property team.