Are you planning to lease commercial premises?
There are several steps to consider when leasing commercial property and this guide covers the key issues you may wish to contemplate.
What type of Property?
The main considerations here are what size and type of premises will best serve your business and perhaps most importantly, what your business can afford. You may also want to check the premises are large enough for you to expand as the business develops. It is prudent to sign up with commercial property agents who can find the right premises for you at this stage.
Instructing a solicitor
Once you have found your perfect premises and have agreed heads of terms you will need to take professional advice and instruct a solicitor to act on your behalf. They will investigate the property fully and negotiate the lease. Having a solicitor on-side means you won’t be blindsided by any unexpected costs or obligations further down the line as well as ensuring the lease is on market standard terms and is as tenant-friendly as possible. You may also want to instruct a surveyor to conduct initial investigations on the premises.
It is of key importance when buying or leasing any property that your solicitor carries out full investigations into the premises to ensure there are no nasty surprises and you know as much about the premises and the area as possible before committing yourself financially.
Your solicitor should first check property title documents at the Land Registry to check the landlord has good title to the property and no else has rights over the premises, which may affect your planned use and enjoyment of the premises.
The Landlord or their solicitor will provide detailed responses to the Commercial Property Standard Enquiries (CPSE’s) and will highlight potential issues such as recent works at the premises, incidents or neighbour disputes. You will then be aware of these and able to ask for more information if necessary.
Property searches should also be conducted and are ordered by your solicitor. They can highlight any potential issues, including but not limited to the following:
- Planning – Is there planning permission for the use of the premises and does it match your planned use for the premises? Are there any restrictions included in that planning permission which may affect your business?
- Rights of way and easements – For example, the general public or a neighbour may have rights to use the premises you are leasing or the right to use a communal accessway, or there may be certain restrictions on the use of the premises stemming from a previous land transaction.
- Boundaries – You should be aware of who is responsible for maintaining boundaries, hedges and walls. Responsibility for this should also be set out in your lease.
- Local area information – For example, is there a new parking scheme or road works which may restrict access to the business, and will you be expected to pay business rates?
- Environmental liabilities – You may think that the landlord will be liable for any environmental issues but that is not always the case and as such, you need to be aware of any potential problems such as land contamination, which can be extremely costly to remediate. This also covers problems such as being in an area of flood risk or more topically, the premises being near a rail development such as HS2 or Crossrail.
- Utilities – You need to make sure that the property is supplied with water, drainage, electricity and gas. Depending on your business you may also need to check if you require consent to discharge trade effluent; is there a charge which may come back on you as the tenant for any of the utilities?
If the property investigation does raise any concerns your solicitor can advise you on any possible solutions; for example, insurance may be obtainable.
The landlord’s solicitor will draft a lease in line with the heads of terms and your solicitor will then review and amend as necessary. There are a number of key issues to consider when reviewing the lease on behalf of a tenant, some of which I have listed below:
- How much rent is payable, when and how it is due, and what other payments will be due? For example, insurance, rent and service charge rent. Is there a rent deposit to pay?
- How is the lease terminated and are you able to activate a break clause if necessary?
- To what extent are you liable to maintain and repair the property and what is the landlord responsible for?
- Any specific rights you require that are particular to your business, like tables outside the premises for a cafe or additional networking space for an office.
- Are you responsible for paying service charge rent, which is usually a fair percentage of the amount the landlord has to spend on the buildings upkeep, for example, lifts, gardens, staircases, lighting etc?
- Will you be able to sublet the premises or assign the lease if you are struggling to pay the rent, and what are the landlord’s restrictions on doing so?
- Most commercial leases include a rental review every 5 years, so this clause should be drafted fairly to ensure neither party is unfairly disadvantaged.
- Are you able to make alterations to the premises and do you need to obtain landlord consent for those? Are you expected to return the premises to its original state once the lease is ended?
- Does the landlord require you or another party to act as a guarantor for the business? If so this will need to be carefully documented.
- Who is responsible for insuring the premises and its contents, and what happens in the event of the property becoming unfit for purpose after a fire or flood?
- Most commercial leases require the tenant to waive their right to security of tenure under the 1954 Landlord and Tenant Act and you will be required to sign a declaration agreeing to this.
The most common ancillary documents to a commercial lease are: a rent deposit deed, which governs the way in which the deposit is handled and then returned; a licence to alter, which is the landlord’s formal consent for works you want to do to the premises; and a licence to underlet or assign, which would be drafted at a later date should you need to assign or underlet the premises.
A schedule of condition may also be required. These are usually drawn up by the property agent or landlord and comprised of a number of images of the premises at the time of the lease as evidence in case of any dispute over repairs or maintenance. Your solicitor can advise you on these.
Registering the lease
Once the lease has been completed and you have moved into the premises, you will need to register the lease at the land registry. This only applies if the lease is over 7 years.
Stamp Duty Land Transaction Tax
Leases are subject to Stamp Duty Land Transaction Tax (SDLT) so your accountant or solicitor will need to check with HMRC if your lease falls within the threshold and a sum may need to be paid within 30 days if necessary.
The most sensible way to approach a new commercial lease is to make sure that you and your solicitor have fully investigated the property, and that you are satisfied with your business can both afford and enjoy the premises accordingly.
How can LawBite help?
Commercial leasing requires careful consideration because it’s often long and complex. There are compelling obligations and responsibilities for tenants, landlords and guarantors, and as such, all parties should ensure that they are safeguarded.
Our expert property lawyers work with tenants and landlords to advise and deal with property disputes, and in general, advise on all types of commercial property law.
For further business legal advice, please enter an enquiry or call us today on 020 7148 1066 to speak to a member of our friendly Client Care Team.
The author of this blog post is commercial property lawyer Katy Dissen.
Katy qualified as a solicitor in 2012 and has gained experience working in the property department of a large city firm. Prior to that, she studied History at The University of Nottingham and Law at Kaplan University London.