How to Negotiate the Best Lease: Top Tips for Commercial Tenants
Negotiating the lease for your commercial premises is one of the most important considerations when setting up or expanding your business. There are many aspects to bear in mind, from maintenance and financial obligations to ensuring the permitted use is correct. Failure to take these factors into account at the outset could result in unforeseen costs and financial penalties or even the inability to use your premises for the purpose that you intended.
Whether your perfect premises is a shop in prime position on the local high street, an office suite in a commercial hub or a warehouse unit on a well-connected business estate, read on for some top tips to ensure you negotiate the best deal for your business.
- What is the rent and can it be reviewed? Carefully check what the agreed annual rent will be – and what will be included as “rent”. Often other payments to the landlord such as service charge and insurance costs will be included as “rent” and your obligations for paying them (and consequences for late payment!) will be the same as the annual rent. As for a review, the landlord is likely to insist on this, especially if the term of the lease is of reasonable length. Watch out for the review being upwards only and check what it will be based on (the open market or Retail Prices Index).
- Can you get a rent free period? This may be particularly important if you will need to carry out any alterations or fit out works before you can start trading from or using the property for your business. If you are intending to fit out the premises, the landlord may need to formally give its consent to this and will usually require that its legal costs are paid by you as the tenant.
- What do you want to use the property for? Usually a landlord will stipulate a permitted use and this must be strictly adhered to. Often it will refer to a particular “use class” under Town and Country Planning legislation. Make sure it’s right for your business!
- What do you have to repair…and when? Your lease may be described as a “full repairing and insuring” (FRI) lease. This means what is says on the tin – the obligations to repair/decorate and insure the property will be all yours and the landlord will have no responsibility for them. These obligations may be significant and very costly, especially as the obligation requires you to put the property into repair as well as maintain it. A prudent tenant will check its obligations carefully and try to minimise its liability – perhaps consider requesting a schedule of condition to record and limit liability to the state the property was in when the lease was granted. Consider also instructing a surveyor to check the property is structurally sound.
- Can you break the lease early? If you can negotiate a break clause in your favour, this will give you the flexibility to end the lease at a certain point during the term on giving the necessary notice. This may be helpful commercially if business is going great and a few years down the line you realise you require bigger premises; or if market conditions change to adversely affect your business you can prematurely end the lease to save paying rent and other costs up to the end of the term.
- Will you have security of tenure? If your lease is not excluded from the Landlord and Tenant Act 1954, your lease may continue after expiry of the term if you remain in occupation of the property for your business. This is often referred to as “holding over”. The Act also provides a tenant with the power to request a new lease on the same terms (excluding rent) where the landlord can only refuse on certain grounds.
- Tax? Last but not least, be particularly aware of VAT and Stamp Duty Land Tax (SDLT). Whether VAT is chargeable on your rent or other “supplies” to your landlord, such as service charge, depends on whether an option to tax the property has been made. You should receive documentary HM Revenue & Customs evidence from the landlord to confirm. As for SDLT, it is your responsibility as tenant to ensure this is paid and submitted with a return form within 30 days of completion. The commercial SDLT rate on the lease should be calculated in advance so that you can consider and factor in this payment early on.