Taking on a new lease can be really daunting for prospective tenants. A lease is essentially a detailed contract between landlord and tenant and there are no ‘standard’ terms. This means it is essential to understand what obligations you are taking on. In this article we give seven top tips on the key areas to think about.
Read the Code for Leasing Business Premises
The current version of the Code dates from 2007 and it is due to be updated soon. The Code was put together by leading organisations in the property industry and seeks to promote fairness in the commercial lettings industry. The Code is not mandatory and not all landlords choose to follow all the points in it but the information is extremely helpful and, best of all, completely free. The Code includes an Occupier Guide aimed at prospective tenants and some model heads of terms to help you negotiate suitable terms.
Consider instructing an agent to negotiate terms on your behalf
Take a surveyor’s advice to ensure it is a fair deal. A little money spent on a surveyor’s fees will pay for itself over the lifespan of the lease and will ensure you get the best terms. Check what the rent covers and whether there are hidden extras such as onerous service charges. Is the rent reviewed? If so, how often and on what basis? Will the landlord charge VAT on the rent? If so, are you able to recover VAT? Comprehensive heads of terms will also help both parties’ lawyers to put together the draft lease as quickly as possible.
How long will your lease be?
Landlords often want the lease to be for as long as possible. Longer leases at higher rents may make you liable for Stamp Duty Land Tax. Leases for a term in excess of seven years must be registered at the Land Registry in order to be fully legally valid. Ensure you negotiate the right deal for your business.
Establish whether you will have the right of renewal at the end of your lease
Unless the parties agree to the contrary, the tenant will have the right to a new lease on expiry. This is the default position under the security of tenure provisions contained in the Landlord and Tenant Act 1954. The landlord has limited circumstances in which it can refuse to grant a new lease. This is a valuable right to have if the premises are essential to your business so think carefully before giving this up. The parties can contract out of the provisions through a procedure involving notices and declarations and it is common for shorter leases to exclude the default protection as this gives the landlord more control at the end of the lease.
Repairing obligations/service charges
Check these obligations carefully and limit your responsibilities as much as possible, especially in short leases. It is very common for a lease to include a ‘good and substantial’ repairing obligation and this can sometimes actually lead to a tenant being obliged to put the premises in a better state than they took them in Consider using a photographic schedule of condition which records the state you took the property in. If you are taking a lease of part of a building beware of indirect obligations to contribute to the cost of expensive improvements to the external and structural areas via a service charge. Also make sure that you are not paying for any ‘voids’ caused by empty units in the building.
Get permissions for any alterations you need to make
Check whether your proposed use requires planning permission or any other permissions. The lease will state what the permitted use is but the landlord will usually not warrant that this is authorised for planning purposes.
If you need to carry out building works you will probably need the landlord’s consent. It is best to get this at the same time as the lease is completed if possible. Sometimes it may be possible to negotiate a rent free period if you are adding value.
Flexibility
Tenant break clauses are common these days but care must be taken to ensure that they work properly. They should preferably be unconditional or at least conditional only on having paid rent up to date and given up occupation. They should never be conditional on compliance with all lease terms (as there are bound to be minor breaches). Make sure you can break the lease when you need to without having to jump through lots of complicated hoops.
On what terms can you transfer the lease or sublet? Again, you don’t want these to be too restrictive. Are you able to sublet parts if the premises lend themselves to this? The landlord should not be able to withhold consent to your proposals unless it is reasonable to do so.
The content of this article is for general information only. If you require any advice on leasehold interests in property please contact Louisa Saunders or a member of Birketts’ Commercial Property Team. Law covered as at May 2019.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2019.