Key considerations when negotiating an industrial unit lease

Taking a lease of an industrial unit is a big commitment, with various steps involved and the growth in industrial lettings driven by logistic demand has seen an expansion of warehouses and hubs in strategic parts of the country.

As part of the due diligence process, you will need to check whether there are any rights, obligations or restrictions affecting the property that may affect your proposed use as well as whether the property benefits from all rights necessary and has adequate access for your use and any proposed works, for example the installation of docking bays.

It is important to review the landlord’s title to the property. The landlord may own the freehold or have a lease itself. Understanding whether any third party consents are required such as from any mortgagee or head landlord if the landlord’s interest in the property is leasehold is important and impacts on overall legal costs as well as timeline for the transaction.

Heads of Terms

Heads of terms setting out the main terms of your agreement with the landlord should normally be agreed at the outset with input from experts to enable the streamlining of the transaction wherever possible.

The heads of terms should be on a subject to contract basis and cover key terms of a transaction, for example:

• The extent of the property to be demised and any rights that you will require such as for parking and access – will the demise include parking spaces/yard area or rights to park?
• Repair and whether the tenant’s repair liability is to be limited by reference to a schedule of condition
• The amount of rent and rent review provisions and the rent review mechanism, for example, whether these are to be open market or fixed RPI Index linked with cap and collar
• Any rent free period or incentive for you to take the lease
• The length of the lease
• Whether the lease will be protected by the Landlord and Tenant Act 1954
• Break rights
• Any rent deposit or guarantee required by the landlord as security for payment of the rent and compliance with other tenant lease covenants and conditions
• Utility supplies
• Alterations and any carve outs to works not needing landlord consent or carve outs in respect of reinstatement
• Alienation- whether you will be permitted to assign, sublet or share occupation with a group company and on what conditions.

There may be additional costs that you will need to factor into your business plan, for example:

• Business rates – this cost should be ascertained as soon as possible as the rates could be expensive – there are some real estate and zonal laws which need to be considered and which if applicable to the location of the property can lead to business rates discounts or exemptions, for example
• Service charge – If you are taking a lease of part of a property, you are likely to have to pay a service charge. You should find out how much this is likely to be and whether the amount will be fixed, whether you will be expected to contribute to any reserve fund and whether any major expenditure is anticipated in the next twelve months. Heads of terms can cover any specific provisions negotiated, for example an overall cap on the amount of service charge you will pay
• VAT – this may be payable on the annual rent and any service charge. Even if VAT is not currently payable it could be payable in the future.
• Insurance – generally the landlord will insure the property and pass the cost onto the tenant. The landlord usually insures for loss of rent to protect his income for any period where rent is not payable because the premises have been damaged or destroyed. You will be responsible for insuring your own contents and possibly any plate glass at the property.
• Stamp Duty Land Tax (“SDLT”) and Land Registry fees – you may need to pay SDLT on the grant of the lease – this is calculated by reference to the annual rent payable plus any VAT payable on it. In addition leases for a term of seven years or more must be registered at the Land Registry and a fee will be payable
• Planning – you should ask the landlord or agent whether the property has planning permission for your proposed use and/or whether any planning consent will be required for any of your proposed works. If a new planning permission is required this will cause a delay in the transaction and may lead to increased costs for you if the landlord is not prepared to pay for it.

Property Inspection and other considerations

It is important that you inspect the property thoroughly and consider any rights which you might require over neighbouring property such as for access, parking or keeping signs, or any rights which neighbours may have or appear to have over the property.

If taking a lease of whole on a full repairing basis, it is important to undertake a survey to check the property’s state of repair and condition. If taking a lease where a schedule of condition has been agreed, it is important to check the schedule of condition report to understand any areas excluded / carve outs to the schedule of condition report and costs need to be considered as to whether landlord or tenant will cover those costs or whether these will be split. If the roof is to be inspected a cherry picker may be required which can increase costs but including the roof condition in any schedule of condition report and ensuring there are photos as well as a commentary  is paramount.

Understanding any usage restrictions in the location is also key and will vary from location to location. There could for example, be noise restrictions; public safety and environmental concerns; the property may be close to a protected or residential area or have restrictions on external appearance; parking or heavy manufacturing use.

Additional documentation

Depending on the heads of terms agreed, an agreement for lease may be entered into which may contain obligations on the landlord for example to undertake works before lease completion in addition to a licence for alterations to cover works the tenant is undertaking.

It is key to ensure that all factors are considered, both in terms of entering into the lease but looking ahead to the position when the lease ends.