Tenant’s guide to commercial leases
Jospeh Preisner highlights the key basic terms of commercial leases that tenants will need to think about and discuss with their professional advisers before agreeing the heads of terms.
Most businesses need space from which to operate, be it an office, a shop, a factory or a warehouse. There are two ways for a business to acquire the space it needs: either purchase a freehold or enter into a lease. Buying a freehold property requires considerable up-front expenditure, whilst leasing can provide a flexible and affordable alternative.
If you have decided that a lease is the best option for your business at the moment, this article will introduce you to the essential terms to consider when agreeing the initial terms.
Heads of terms
The letting process begins with the “heads” being negotiated and agreed between you (as the tenant) and the landlord. The heads set out the key terms of the lease such as term (duration), rent, repairing obligations and service charge provisions. It is important that you agree these terms before you incur any substantial costs negotiating the detail of the lease.
A lease will often specify that premises can only be used for a particular purpose. It is important to ensure that the permitted use is suitable for your business. You should also consider your potential future use of the premises in case your business changes or expands, or in case you need to assign the lease or sublet the premises to a third party.
Assignments and sub-letting (alienation)
A lease will typically be offered for a fixed term. But as with the permitted use provisions, you should always keep in mind what will you do if you need, for whatever reason, to move out of the premises early. To ensure that you can maximise your options there are a couple of provisions you should try to get the landlord to agree to:
- the ability to assign the lease
- the ability to sub-let the premises.
With an assignment you would transfer the lease to a third party who will step into your shoes and assume your responsibilties. A sub-letting means that you remain involved with the property because you become the landlord to the sub-tenant; whilst remaining responsible to your landlord for the payment of rent and other obligations under the terms of the lease.
A landlord will invariably require restrictions on how the lease can be assigned and/or sub-let; and most will require that their consent is obtained first. The more you can minimise the restrictions, the more options you will have in the event that you need to assign or sub-let.
Alterations and additions
It is likely that the landlord will want to restrict what you can alter or add to the property. Sometimes this can take an outright prohibition on making any changes. A more reasonable variant on this is a requirement that you get consent from your landlord before making any changes.
If you know from the outset that you will need to make changes you should include this in your discussions of the lease terms; requiring that provision is made in the lease for you to make particular changes.
The lease will require that you keep the premises in a good state of repair. There are ways that you can reduce your liability for repairs. For example, you could request a provision that states you are not require to hand back the presmies at the end of the lease in a better state of repair than they were when you took the lease.
The state of repair of the premises at the time of the lease is usually agreed in a schedule of condition which is attached to the lease.
Leases will often contain provisions requiring the tenant to contribute to shared area maintenance costs (for example landscaping a common area on a business park and repairs to shared hallways and stairwells in an office block).
You should try to negotiate a cap on the level of contribution required of you. Another option is to set out in the lease the costs for which you agree to be liable.
This will give you (and possibly also the landlord) the right to exit from the lease early by giving notice. As with the ability to assign and sub-let, break options are an important part of ensuring that you have as much flexibility as possible.
Break clauses require careful attention to detail; for this reason there is a separate article on our website dealing with issues arising out of break clause provisions.
Depending on the rent and the length of the term you may have to pay stamp duty land tax (SDLT). SDLT is 1% of the amount by which total rent payable over the term exceeds £150,000. VAT may also apply. You should confirm the position with the landlord at the earliest opportunity. Business rates are likely to be payable, and as with VAT you should establish this cost at an early stage.
This guide is only intended to give tenants a flavour of the issues they will need to address on taking on a commerical lease. If you have any queries or would like to discuss any aspect of this article or issues arising out of it please contact Joseph Preisner.