Top ten tips for tenants - how to negotiate the best terms in this unusual market

01/04/2009

By Owen Walsh, Solicitor in Commercial Property & Development.

More and more, we are entering a tenant's market. This is good for tenants looking for new premises as landlords are now willing to consider terms which might have been unacceptable to them less than a year ago.

If a tenant is struggling in this current economic climate, a dialogue with its landlord on some of the points below might give some valuable breathing space.

So how can a tenant take advantage, and protect its position going forward?

1. Monthly payments - some non-institutional landlords are now prepared to consider a tenant's request to pay monthly rather than quarterly. This can help cash-flow and could make all the difference to a struggling tenant. Institutional landlords are more reluctant to accept such a demand, but it is still worth asking if your business is having difficulty meeting rent demands.
2. Flexible term - maintain flexibility by negotiating for a shorter term, and requesting an option to break. However, be aware of how this could affect the marketability of your lease. A very short term may not be desirable to a prospective assignee or sub-tenant. Take the advice of a surveyor to get the best deal possible, while ensuring you have an “exit strategy” in case your business faces difficulties.
3. Protected tenancy - consider making your tenancy protected under the Landlord and Tenant Act 1954. Not only should this ensure your right to remain in occupation once the original term has come to an end but it could also improve the marketability of the lease. If the tenancy is terminated at the end of the term then the landlord will have to pay compensation.
4. Rent-free periods - landlords generally look to protect their headline rent levels. They are therefore more likely to consider offering longer rent-free periods to entice prospective tenants, rather than accepting an overall lower rent. Your surveyor can advise you on the open market value of rentals in the area, and what period of rent-free should be requested.
5. Conditional break clauses - be sure to resist any conditions that a landlord might try to attach to any break clauses. Avoid a landlord's break option, as this threatens the certainty that a tenant needs to continue its business.
6. Rent deposit v guarantors - paying a rent deposit can seriously hamper your cash-flow, just when you need it most. You may have to consider offering a personal guarantee instead. Be aware that your personal assets may be at risk if your business fails.
7. Due diligence - now is the time to carry out searches and be aware of anything that could affect your use of the property. An adverse condition could mean you may be able to negotiate a lower rent. If the condition is serious, then consider looking for alternative premises.
8. Mitigate your liability - consider asking for terms that exclude your liability for inherent defects, contamination and uninsured risks.
9. Rent review - be aware of the different options for rent review. Landlords will usually require reviews to be upwards only. However, the British Property Federations' Lease Code suggests that rent reviews should be upwards or downwards, to take account of market fluctuations. Other alternatives are rent reviews linked to turnover, profit or the Retail Prices Index. Make sure that you are aware of the risks involved with each approach.
10. Assignments/subletting - try to negotiate maximum flexibility in your ability to assign or sublet. Landlords may now be more amenable to a request to sublet part of a property. This could provide a struggling tenant with an alternative form of income which could make all the difference in paying the rent.

What you can do now

Ensure that you do all that you can to keep rental payments low and enhance the marketability of the lease. A landlord is more likely to be flexible to ensure the property is occupied, if only to avoid paying business rates. Be aware of the local market so that you can judge what terms a landlord will accept, and those it won't.

If your business begins to struggle, maintain dialogue with your landlord so that you can get as much help as possible to help ensure profitability.

Take regular advice from your lawyer as we can help you have an effective plan to cope with the economic downturn, emerge strongly and hit the ground running when the upturn begins.