Pitfalls to be aware of when taking on a new lease
When taking on a commercial lease, many factors come into play – here are the main issues that tenants need to think about before going ahead.
The law will not save you from a bad deal, and this is particularly relevant to commercial leases. If you were taking on a residential lease, there are several safeguards in place to prevent rogue landlords from taking advantage of you – there are no such protections when it comes to a commercial lease.
Most leases will have a full repairing liability and will require a tenant to keep the property in ‘good and substantial repair and condition’. If the property is not in that state, then a tenant will need to put the property into the required condition, irrespective of whether they were the cause of the disrepair. Inspect carefully and check the building systems all work well, before you sign up.
If a lease is of the whole of the building, as opposed to the interior, the repairing obligation will extend to the structure and exterior of the building. This could prove particularly costly – a tenant on a short-term tenancy could themselves presented with a bill for thousands of pounds to carry out roof repairs at the end the term, despite the roof already being in poor condition when they moved in. Thankfully drones now make it easier to do a high roof inspection than it used to be.
If the property is not in good repair and condition, then one way to limit your repairing liability is to produce a schedule of condition, evidencing the state of the property at the beginning of the tenancy. The lease would then limit your liability to keeping it in the condition shown in the schedule. Another way would be to remove the repairing liability from the lease, although this would not be considered a reasonable amendment, and is unlikely to be accepted. It is highly recommended that a schedule of condition is professionally carried out by a qualified surveyor, in case any disrepair is missed, or unclear, and consequently become the tenant’s responsibility.
- Security of Tenure
The Landlord and Tenant Act 1954 grants commercial tenants a right to a new lease when their lease expires. This is to protect the goodwill that tenants can attract over time by being in a certain location. However, landlords generally want to retain control over who they lease their property to and on what terms a lease is granted. This means that most commercial leases will therefore be excluded from security of tenure, thereby removing a tenant’s statutory right to a new lease or compensation at the end of the term. This is negotiable, however, and it is recommended that tenants push for their lease to benefit from security of tenure, and not be excluded from the Landlord and Tenant Act 1954.
Although this may mean that concessions are made elsewhere when negotiating the terms of their new lease with the landlord, benefitting from security of tenure could make their lease and therefore business more valuable, making it easier to sell on or find investment.
If a lease has been excluded from security of tenure, the tenant will need to leave by the end of the term, or risk being classified as a trespasser. Enjoying security of tenure requires a landlord to follow strict statutory procedures and prove certain grounds to get a tenant out, and these can take time – this additional flexibility can be of real benefit to a tenant, especially if they are still negotiating new terms with a landlord or looking to move elsewhere.
- Break clause
Most commercial leases contain a right for a tenant to end their lease early, called a break option – which is invaluable, as break options grant a way out for a struggling tenant, or one simply looking to move elsewhere.
That said, most landlords will impose certain conditions that need to be complied with on the break date – if any of the break conditions are not satisfied, the lease will not end on the desired date. Often the conditions imposed allow a landlord to easily invalidate a break notice and prevent the tenant from ending the lease early.
To avoid this scenario, any break conditions should follow the market norm and you should get legal help to serve a break notice. Ideally, no break conditions should be imposed, but this is unlikely to be agreed by a landlord. A tenant should make sure the break conditions are clear and in line with The Code for Leasing Business Premises in England and Wales 2007 (a 2019 version will be released soon).
- Assignment and subletting
Much like a break clause or security of tenure, a right to grant a sublease or assign (i.e. transfer) your lease, is key to business continuity and flexibility.
A lease should allow a tenant to deal with their lease in such a way, either because they will want to move elsewhere, sell their business or share the burden of the rent. Such rights avoid a tenant being locked into a lease and offer them a way out.
Usually a lease will impose certain conditions and it is important, as with a break option, that those conditions are standard and reasonable conditions. If the landlord is able to set difficult conditions, then a right to sublet or assign could be less useful than first appears. When transferring a lease, an outgoing tenant should expect to provide a guarantee to the landlord guaranteeing the new tenant’s obligations under the lease, but not much more than that. Personal guarantees and rent deposits should also not be volunteered on assignment, if possible.
Along with a right to sublet or assign the whole, a right to sublet part of the property should be sought by a tenant at the outset, as normally a tenant can only sublet or assign the whole of their lease. Subletting part would mean that a tenant can defray their space costs to a third party, which can be helpful if a tenant has unused space.
- Service Charge
If a property forms part of an estate, or if a tenant shares a building with other tenants, a landlord will often provide certain services. If the rent is not all inclusive, this will usually result in a service charge being payable.
A tenant should seek to limit the amount of service charge payable, by either asking for a cap on the amount of expenditure and / or by carving out certain items that the landlord can try to charge back to the tenant.
A solicitor can ensure that appropriate wording is used so that all services are carried out efficiently and economically, and that the services being offered are reasonable in the circumstances.
A lease can be a huge liability for a business, and often its biggest overhead after staff. It is highly recommended that:
- a tenant approaches a surveyor to negotiate the terms of the new lease from the outset; and
- a solicitor is then instructed to review and negotiate the lease. We can make sure that the agreed terms are incorporated into the lease, because outline terms agreed between a tenant and landlord are not binding until they are incorporated into a lease or written contract.
This two-stage process is essential in getting the best deal and providing a tenant with as much protection as possible.