When reading the terms of a commercial lease it is vital to remember that they have been drafted by your landlord (or more likely their agent). Therefore, they are construed to benefit the landlord. To ensure your best interests are protected, you must be prepared to negotiate on terms.
The idea of negotiating a commercial lease may sound intimidating, especially if your landlord is a large company. However, the extent of your negotiating power will largely depend on market conditions. If landlords are struggling to find tenants for premises, they will be more open to discussion. You may be able to agree to lower monthly rent, a break clause, a rent-free period, and alterations or renovation of the building before occupation. But if queues are waiting to rent quality space, you will have a harder time negotiating terms. Fortunately, due to the twin revolutions of online shopping and working from home, for the time being at least, the commercial property market is highly skewed in the tenant’s favour.
To negotiate a commercial lease successfully, you need to understand what is included in the document itself and the meaning of the various clauses.
What is included in a commercial lease?
A standard commercial lease will contain the following terms:
- area demised - refers to the property that you, as the tenant, have been granted the right to occupy and use. This area will be referred to in the lease as the Demise
- rent – how much rent is due and when must it be paid. You may also have a rent-free period at the beginning of the lease.
- term – how long the lease is for.
- break clauses – allow you or the landlord to terminate the lease before the official end date.
- rent review – a clause that states when and how the rent will be reviewed.
- guarantees – the landlord is likely to want a guarantor if you have a poor credit rating or are a startup.
- service and maintenance responsibilities – who is responsible for repairs and maintenance, not only the work itself but the associated costs.
- assignments and underletting – most lease agreements will state the landlord’s consent is required if you want to assign or underlease the property. Failing to acquire permission will result in you breaching a covenant of the lease agreement.
- use - a commercial lease will expressly set out how the property may be used. This will usually be defined as the Permitted Use. The Lease will either express the permitted use positively i.e. “the Tenant shall use the property for [a permitted use]” or negatively i.e. “the Tenant shall not use the property otherwise than for [the permitted use]”. Most leases require that tenants seek the landlord’s permission before applying for a change if use.
- alterations and improvements – the lease will set out what changes and improvements you can make and when permission from the landlord is required. It is likely the lease will state the property must be returned to its original state at the end of the lease.
- security of Tenure – if you have Security of Tenure you have an automatic right under the Landlord and Tenant Act 1954 to renew your lease on the same terms once it expires. You can contract out of Security of Tenure; however, your landlord must serve you notice that sets out the risks of not having Security of Tenure and you are required to seek independent legal advice.
- insurance – states who is required to insure the property. If the landlord takes out the insurance policy usually the tenant will be required to pay a proportion of the insurance premium.
- rights, reservations, and exceptions – these clauses cover the landlord’s right to deal with and develop neighbouring land, the right of the tenant to use parts of the property such as stairs and parking, and the ability for the landlord to enter the property to undertake repairs.
What terms can you negotiate in a commercial lease?
Technically, almost all terms in a commercial lease can be negotiated. However, time and money (and the landlord’s patience) will likely limit what you can realistically haggle over. Below are the top five commercial lease clauses worth focusing your negotiating prowess on:
- rent-free period – with landlords struggling to get tenants into retail and office spaces now is the ideal time to ask for a rent-free period at the beginning of the lease. You will benefit from having a grace period in which you can get established and keep cash free to cover the costs of any alterations, furniture etc you require when moving in. And your landlord wins by not having to pay business rates (they become your responsibility).
- break clauses – if you are signing a lease that is several years in length you need some flexibility in case your circumstances change. For example, you may be a startup accounting firm and require a small office at first. However, the business could expand rapidly in the first few years, resulting in your current premises becoming completely unsuitable. Make sure you can end the lease early if you have to.
- security of tenure – make sure you understand the risks of contracting out of the Landlord and Tenant Act 1954 protections. Without Security of Tenure, the landlord has every right to refuse to renew your lease or offer to renew it but with substantially changed terms.
- repairing obligations – a full repair and insuring lease (FRI lease) is a lease where the costs of all repairs and insurance are your responsibility. However, the pitfall of this is you must put the property back into repair even if it was in disrepair when you took on the lease. A repairing obligation does not mean you must hand the property back to the landlord in full repair at the end of the lease – if something needs fixing during the term it must be done within a reasonable time. Therefore, make sure you have a detailed Schedule of Condition which records the state of the premises at the start of the lease and stipulate that you do not have to put the property into any better state of repair than it was at the start of the lease as evidenced by the Schedule of Condition.
- rent reviews – the impact of rent reviews can severely affect your business if they fall in harsh economic times. One way to protect yourself is to negotiate a cap on future rent increases to ensure your rent will not rise to an unsustainable amount in the future.
The investment you make in obtaining professional advice from a Commercial Property Solicitor when negotiating a commercial lease will pay significant returns. Not only will you mitigate your risk of incurring significant costs down the line because of a clause in your lease you were unaware of, but you will also be in a strong position and have the confidence to negotiate favourable terms.
Get legal assistance from LawBite
If you are looking to take on a commercial property lease, LawBite’s expert commercial property lawyers can provide strategic and practical business legal advice at all stages of the commercial lease agreement process.
If you are dealing with issues arising from your existing commercial premises, whether freehold or leasehold, contentious or non-contentious, our commercial property solicitors are on hand to advise.
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