Taking on a commercial lease? Here's 5 things to check first
When starting a new venture or moving to new premises it is often an exciting time, but this does sometimes lead to people getting carried away in the moment or not having sufficient funds to take proper advice from the outset when entering into a lease. However, not giving full consideration to what your responsibilities are can have expensive consequences further down the line. Most surveyors would rather provide advice when a lease is being agreed than be contacted to trouble shoot further down the line. With that in mind, here are 5 things
you should really make sure you understand before signing on the dotted line:
1. The Rent. How much are you going to pay?
It seems an obvious question but it is not just about the initial rent agreed with the landlord. There are a number of things to consider:
- Will the landlord offer you a rent-free period to allow you time to undertake your fit-out or carry out repairs to the property to make it tenantable?
- Once the rent has been agreed you should make sure you understand what will happen to this in the longer term. Leases vary and the mechanisms for reviewing (i.e. increasing) the rent can all be very different. These range from fixed increases, relying on market data of comparable premises to applying inflationary increases and the periods for review can vary from annually to longer periods such as every 5 years.
- What about the Service Charge? How much is it? How is it calculated? Is there a cap or is the sky the limit?
When you understand how your rent will change over the period of the term and what else you might have to pay out, run through a few different scenarios on a spreadsheet. See how these changes will affect your overheads and ask yourself if you can still afford to operate.
2. The Term. How long are you signed up for?
Typically this will be something that is agreed early on in your negotiations and you must make a decision to suit your circumstances. That said, market conditions will also influence lease length and in a bullish market landlords will be pressing for longer terms. Leases sometimes contain a Break Clause which will allow the tenant (and sometimes the landlord) to bring the lease to an early end. However, many of these clauses are “conditional” and can only be exercised if you also comply with a number of other conditions, some of which can be very difficult to achieve. Ideally you should try and avoid any conditional break clauses as even something as simple as ‘vacant possession’ can provide a hurdle that could see you stuck with a lease for another 5, 10 or 20 years. If you intend to exercise a Break Clause, make sure you understand what you have to do and plan well ahead. In contrast to the scenario of an early exit, you may have to consider what options you have to remain after the initial term in your lease. Does the lease contain a right for you to be granted a new tenancy on the same
terms? What security do you have? Quite often the more flexible the terms of the lease, the less security you are afforded – what is more important? Be wary if you are being asked to allow for the lease to be “contracted out”.
3. Repair & Decoration – Maintaining the Premises. What do you have to do?
Normally, leases will require you to keep the premises in good repair and to decorate at regular intervals. This can seem reasonable enough on the surface but there are a number of things to bear in mind:
What are the Premises? Is it just the inside, the whole building or the buildings and land? Make sure you understand what it is you’re responsible for.
Think about what sort of condition the premises are in before you move in. The word “keep” in the context of repairing obligations is backed up with case law to confirm that this actually implies to “put and keep”.
Therefore if the premises are in poor repair at lease commencement, you first have to put in good repair and then maintain it that way.
How often do you have to decorate and what needs painting? All surfaces or just those usually painted? What about powder-coated aluminium windows or pre-finished cladding panels?
Are you able to limit your liability with a Schedule of Condition? You may be able to append a formally agreed document of the condition of the premises to the lease and temper the repairing liability so that you aren’t obliged to give back a building in any better state of repair than when you took occupation.
4. Other Covenants – What else might you have to do (and what can’t you do)?
READ THE LEASE! Arguably this should be No. 1 and it is surprising how many people/organisations don’t know what they signed up for and contracted to do. Have a look through the lease and see what else you might be required to do. Sometimes these obligations are all grouped together, other times they are spread thinly throughout the document but, wherever they are, you need to comply. Some of the more common additional requirements or
restrictions are as follows:
- Cleaning the windows on a monthly basis
- Comply with Statute
- Payment of a service charge
- Maintain landscaping
- Restrictions on sales of alcohol, gambling, sleeping on the premises
- Take out insurance to cover the damage to glass in the windows
- Alienation – are you able to assign or sub-let? What are the restrictions on this?
- 5. How responsible are YOU if things go wrong?
We all like to hope that everything will work out for the best and much of the time it does – but not always. Landlords are quite understandably keen to ensure that their property remains in good condition and that they receive the rent they are due under the terms of the lease. In order to protect this position they will sometimes ask for a parent company guarantee in the case of a subsidiary business or possibly a personal guarantee where smaller businesses are concerned.
If you are required to provide such additional security, think through all of the points above and ask “can I afford this if it all goes wrong?” Think about your financial planning, security of your home, protection of your other assets….
Barry Walker Barry is head of the building consultancy team within the Sheffield office of BNP Paribas Real Estate. He joined in 2006 and has nearly 20 years experience in commercial building consultancy. Contact him at firstname.lastname@example.org