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Considerations for Tenants - Commercial Property Leases
WHAT DO I NEED TO CONSIDER AS A TENANT LEASING COMMERCIAL PROPERTY?
Taking on commercial property as your new place of business is a major commitment. You need to consider carefully the details of the lease and any property information, to be confident that your business will run smoothly from your chosen location. Overlooking detail in the hope to have keys released to you sooner by the Landlord can prove costly.
With your interest in mind, your Solicitor can ensure that the lease offered by your future Landlord is in accordance with the terms that you have agreed.
At the same time your Solicitor can advise you on questions you may have such as:
WHAT NEEDS TO HAPPEN BEFORE I CAN COLLECT THE KEYS?
With a straightforward lease, before the release of keys by the Landlord you will need to go through the following steps:
- Inspect the property: viewing the property should highlight any immediately apparent defects, which you should try to have excluded from your repairing obligations.
- Negotiate terms with the Landlord or Landlord’s agent and finalise the Heads of Terms.
- Finance and tax: ensure you have sufficient funds to pay the rent deposit (if any), any rent in advance, Stamp Duty Land Tax, the cost of property searches, Land Registry fees (if applicable), your Solicitor’s fees and disbursements.
- Instruct your Solicitor to deal with the following stages:
- Review the Landlord’s title documents
- Review the standard replies to enquiries regarding the property
- Check the draft lease and any other lease documents, such as rent deposit deed or licence for alterations
- Provide a report highlighting your rights and obligations under the proposed lease
- Submit property searches (if required)
- Sign the lease and any other documents following your Solicitor’s report to you and transfer completion funds.
- Completion: your Solicitor will deal with dating the lease documentation with the Landlord’s Solicitor and inform you that keys are available.
Once you have the keys, there will a number of post-completion steps to be dealt with by your Solicitor including:
- Dealing with the Stamp Duty Land Tax requirements (if applicable)
- Registering the Lease at the Land Registry
HOW IS THE ACCESS AND ARE THERE ANY RESTRICTIONS ON USE?
Can I physically access the property at all times? Are there any limits on what I can use the property for? Is parking included? Are there specified loading bays?
The provisions in the lease need to cover access to and from the property including any external areas.
Any time restrictions should also tie in with your business running hours (restrictions are imposed generally when taking on a unit within a shopping centre).
Leases generally highlight the permitted use and also include a list of prohibitions. These will need to be checked to ensure you can carry out your business.
HOW QUICKLY CAN I MOVE IN?
To minimise disruption to your business, be sure to confirm the date you want to move in to both the Landlord or Agent and your Solicitor. Your Solicitor can then work to the same timescale.
You may want the keys as soon as possible or the Landlord may have agreed to carry out works before you occupy.
If the latter, has the Landlord confirmed the date by which all work will be completed (including any ancillary inspections and cleaning). The relevant documents can then be drafted to reflect this.
HOW LONG SHOULD I COMMIT FOR?
Leases are generally for a minimum of 3 years however the length of term agreed will be a result of what you negotiate with the Landlord.
Any lease longer than 7 years will require registration at the Land Registry.
Also note that the length of lease and the amount of rent payable will dictate whether or not Stamp Duty Land Tax is payable.
IS THERE AN OPTION TO END THE LEASE EARLY?
A break clause in the lease allows either you or the Landlord to end the lease early. Sometimes it will include the Landlord also having this right to break the lease early.
For example, you may have the option to end the lease on the 5th anniversary into a 10 year lease by serving the relevant notice as required by the lease.
Where there is a Tenant break clause the Landlord will place conditions on which your break notice can be served. It is important that you consider whether such conditions are fair and your Solicitor can advise whether or not they are in line with the lease code.
Failing to comply with any of the conditions will result in you being unable to exercise the break and remaining in the property for the remainder of the term. Careful drafting of the break clause is therefore imperative.
IF I WANT TO STAY LONGER THAN THE AGREED LEASE PERIOD, CAN I RENEW?
Business tenants want to have security of tenure which is the right to stay in their business premises when the lease ends.
A Landlord can choose to take the lease ‘outside the Landlord and Tenant 1954 Act’ and would benefit him by doing so. If the lease is taken ‘outside the Act’ you must vacate the property when the lease ends. You will be asked to swear a Statutory Declaration in front of an independent solicitor acknowledging that when the lease comes to an end you agree to vacate the property.
Whether or not you will have security of tenure is a point of negotiation and is normally agreed at Heads of Terms stage. The lease is then drafted accordingly.
CAN I HAVE A RENT FREE PERIOD?
You may want to carry out fit-out works and so a rent free period for the first few months will be beneficial.
Feeling it is a valuable investment, the Landlord may allow a rent free period for say 3 months to encourage you to fit out the property. Alternatively, the first year rent may be reduced to accommodate the rent free period (which sometimes helps from a Stamp Duty Land Tax perspective).
Whether or not you will have a rent free period is a point of negotiation and is normally agreed at Heads of Terms stage.
WILL THE RENT INCREASE DURING THE LEASE?
The longer the lease is, the more likely the Landlord will want to the right to increase the level of rent. This is called a rent review clause.
Although it is common to see rent reviews every 3 or 5 years, when the rent review occurs is down to negotiation between you and the Landlord.
There are different types of rent review clauses such as:
- open market rent review: this is when the rent is based on the open market for a rent the Landlord could expect to achieve at the time of the review.
- index linked: this is when the increase is linked to an index such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI)
- turnover rent: this is a mechanism where all or some of the rent is linked to the amount of money taken by you from your customers in a particular period. Although not technically a rent review, it can dictate a change in the rent payable
- fixed increases: you may agree to a certain increase in rent each year (for example £5,000 each year)
IS ANY VAT PAYABLE?
Commercial properties are generally exempt from VAT.
If the property has been ‘elected for tax’ by the Landlord however, the Landlord must charge VAT at the standard rate on the rent and provide you with a copy of their ‘Option to Tax’ from HMRC.
VAT is also then charged on maintenance fees and service charges.
If you are VAT registered, you may be able to claim the VAT back. If you are not, you cannot reclaim the money and so think about negotiating a reduced rent or speaking to your accountant.
WILL I BE RESPONSIBLE FOR EXTERNAL REPAIRS AS WELL AS INTERNAL?
Your responsibility will depend on how the lease is drafted.
You may only be responsible for internal decoration but with a typical commercial property lease your obligations are likely to be more extensive.
Leases fall into one of two categories being:
- Fully Repairing and Insuring (FRI); and
- Internal Repairing and Insuring (IRI).
With an FRI, you are responsible for internal and external repairs including any maintenance of the structural parts of the property.
With an IRI, you are directly responsible for the internal repairs. The Landlord is responsible for the external and structural parts of the property however you will contribute to costs incurred by the Landlord.
Careful drafting of the lease is key to preventing the majority of disputes which relate to repairing obligations. You will need clear provisions as to who is responsible for repairing various parts of the property. Your Solicitor will be able to highlight any unusual or onerous repairing obligations before you sign.
IS GAS, WATER AND ELECTRICITY AVAILABLE AT THE PROPERTY?
Utilities are not usually included within the rent figure. Unless the Landlord gives enough information such as copies of recent utility bills, you may need to raise your own enquiries with the relevant service providers as to how much is payable.
You may also instruct your Solicitor to carry out searches against the property in order to establish whether there is a mains water and drainage connection. Your Solicitor can then report back on the results, and raise any necessary enquiries to the Landlord’s solicitor if anything is unclear.
DOES THE ESTATE HAVE A SERVICE CHARGE, AND WILL I HAVE TO CONTRIBUTE?
If the property forms part of a wider estate or complex such as a business park, there is likely to be a charge for the use of estate roads and other shared facilities.
Ensure that you discuss what the charge includes and how much the Landlord anticipates charging you in each year. Depending on your bargaining power, you may be able negotiate a cap or limit on the charge although this will depend on how the Landlord operates the service charge for the relevant estate. It is important to obtain a copy of the last 3 years’ service charge accounts, to show how the service charge has been used previously.
The lease will need to reflect the Landlord’s responsibility to carry out the various services and a mechanism as to how and when you are charged. Your Solicitor will be able to raise necessary enquiries and report to you on the information given in return.
It is important to be aware of what is involved before signing up to a new lease. Entering a lease without advice from specialist commercial property lawyers can result in additional costs later down the line.
HCB Solicitors provide a full range of services for tenants including leases, renewals, and licences to assign, alter or sublet. We believe that completion of property agreements should not be complex and time consuming, but dealt with seamlessly, proactively and expediently.