Negotiating commercial property terms

You have found the perfect premises for your business – be it office space, an industrial unit or a shop. Whilst some businesses will purchase their premises, the next step for you like the majority of other businesses, will be to take a lease and a number of aspects must be considered when negotiating the terms.

1. The Demise

The “demise” is the area of the property that will be rented and it should be clear what it includes e.g. the whole of a building or just one floor, the roof and all walls and windows or just the internal parts. A plan showing the layout should be used wherever possible.

2. Term

The length of the lease may be a number of months or years.  Long leases of more than 10 years are less common nowadays as businesses aim for flexibility but this is ultimately down to negotiation with the landlord.

3. Landlord & Tenant Act 1954

This legislation allows a business tenant to remain in occupation and ask to renew their lease when it comes to an end. It is a valuable right and tenants with the benefit often have to pay a higher rate of rent as a result.

4. Break

This legislation allows a business tenant to remain in occupation and ask to renew their lease when it comes to an end. It is a valuable right and tenants with the benefit often have to pay a higher rate of rent as a result.

5. Rent

How much rent do you have to pay and when?  Most commonly, rent is paid in advance in equal quarterly instalments. Longer leases often provide for rent to be reviewed during the term. The procedure must be carefully negotiated to avoid having to pay a much higher rent in the future.

6. Rights

Is access to the property over land not included in the demise? Are there common parts such as parking areas and entrances that the lease should include rights for the tenant to use? It is worth checking, before you sign.

7. Service Charge

If there are common areas, you should ensure you know who is responsible for maintaining them. You may be expected to contribute towards maintenance costs and the details must be set out in the lease.

8. Repair

You must ensure that you understand who is responsible for repairing and maintaining the property. You should inspect the property and obtain a survey to ensure it is in good repair.

9. Schedule of Condition

If the property is in poor condition you should limit your obligations to its current state evidenced by photographs.

10. Dilapidations

Landlords can serve a schedule of dilapidations during the term of a lease or at the end if a tenant defaults in complying with its repairing obligations. Landlords often look to charge costs incurred in preparing a schedule to the tenant as well as the costs of dilapidations themselves. Obligations should be limited to a fixed period after the end of the term.

11. Insurance

Whose responsibility will this be? If the landlord insures, will you be expected to contribute towards the premium? Is the Landlord obliged to repair the property following damage by something the insurance covers and will you still be expected to pay the rent whilst repairs are being carried out?

12. VAT

If the Landlord is charging VAT on the rent, you should ask for evidence that it has notified HMRC.

13. Security

Landlords often ask for a deposit to use if a tenant defaults in paying rent or complying with its obligations in the lease – a separate deed should specify how the landlord can use the money and when it will be repaid to the tenant. Alternatively, a guarantor can join as a party to the lease and agree to pay rent and take on the lease if something happens to the tenant.

14. Your Landlord

Always check the Landlord’s title to the property – do they own it or are they occupying under their own lease? Is the consent of the landlord’s mortgagee or a superior landlord required?

15. Stamp duty land tax (SDLT)

SDLT may be payable depending on the rent and if a premium is paid.

16. Minimum energy efficiency standard (MEES)

It is now unlawful for landlords to grant leases of properties that have an energy performance certificate (EPC) rating below “E” unless an exemption applies. It is important to note that this minimum standard could rise in future.

17. Alterations

Do you need to carry out fitting out works to the property? If so, the Landlord’s consent may be required. Also, consider negotiating a rent free period whilst any works are carried out.

18. Forfeiture

The lease may specify events that allow the landlord to bring it to an end e.g. if the tenant is declared insolvent or does not pay rent.

19. Use

The lease may restrict the use of the property – check that this is suitable for your business and whether this is permitted under planning law.

20. Sharing Occupation

Sharing occupation or underletting part of a property allows a tenant to make use of unused space. The lease may specify whether this is allowed and any conditions must be complied with.

A lease creates contractual obligations and a tenant should seek legal advice from the outset. Please seek professional advice if you need assistance in negotiating your business’ new lease.