Commercial leases

Commercial leases contain many hidden and costly pitfalls, the impact of which often become apparent only when it is too late. Considering the main financial terms, your requirement for flexibility and negotiating your main lease obligations with your landlord at the outset can avoid these problems. The following outlines the principal standard lease terms, what to look out for and what to negotiate with your landlord before any paperwork is even produced.

Financial Considerations

1. Rent - Ensure the rent agreed with your landlord is the market rent for the type of premises in the area. More importantly, it may be reasonable to receive a rent-free period at the start of the lease. 2. Rent review - If the lease is for longer than three or four years the landlord will most likely require that the rent is ‘reviewed’. The most common form of review is on an upwards-only basis on the anniversary of every fifth year. With this type of review the rent will not go down, but will either remain the same or will be increased. 3. Stamp Duty Land Tax - This is often overlooked at the financial planning stages when considering taking a new lease. Generally, Stamp Duty Land Tax is payable upon the grant of a new lease at the rate of 1% on the aggregate rent over the term. If the lease is more than five years in length and provides for a rent review upon the fifth anniversary, if that rent review results in an increase of rent of more than 5% plus retail price index, there may also be an additional Stamp Duty Land Tax liability. 4. Service charge - Where the premises are part of a larger building or estate, the landlord will seek to recover its cost of repair and maintenance of the unlet parts from the tenants via a service charge, of which you will pay a proportionate part. It is wise to seek a cap on the total annual amount the landlord can charge you through the service charge. In any event, the items for which the landlord can recover its costs should be tightly controlled.

Expensive Obligations

1. Repair - Typically, you will be obliged to keep the premises in a good state of repair and condition. This includes an obligation to put the premises into good repair if they are not already in that state. To exclude this obligation you should require that the lease is subject to a ‘schedule of condition’. This means you will not be obligated to maintain the premises in any better state of repair than as at the date of the grant of the lease. 2. Fit out - Tenants almost always wish to fit out the premises before or during their occupation. Commonly, leases allow only internal non-structural alterations provided the landlord’s consent and approval is formally obtained before the works are carried out. However, this is not always the case and some leases are more restrictive. 3. Dilapidations - At the end of the term, the lease will usually require that you remove your fit-out works and any other alterations you have carried out, make good any disrepair at the premises and decorate them in colours and materials approved by the landlord. 4. Insurance - Usually, your landlord will maintain buildings insurance, of which you will be required to contribute a proportionate part of the costs. However, you will require your own contents and public and employers’ liability insurance. Don’t ignore the risks of terrorism – make sure your lease is suspended in the event of a terrorist attack.

Flexibility

1. Term - It is common for tenants to negotiate a reasonably long term, with a right for the tenant to terminate the lease at regular intervals, for example a 10-year lease with a right to break at years three and seven. You must negotiate that your right to break is unconditional. Any condition requiring complete compliance with your lease obligations will never be acceptable, as even the most careful tenant will commit minor breaches, which would result in the loss of the right to break the lease. 2. Lease disposal - To increase flexibility and reduce your losses where the whole or any part of the premises are surplus to requirements you must ensure that you are at least permitted to sell on (assign) your lease. Preferably your lease should also allow subletting of the whole of the premises, and ideally any parts capable of being sublet. Your lease will most likely provide that if you wish to assign your lease you will be required to stand as guarantor for the assignee until that assignee itself assigns the lease. This is standard. In terms of subletting, some leases provide that you will not be permitted to sublet at a rent less than the rent payable in your lease or the then open market rent, whichever is the greater. This is not acceptable. 3. Use - Obviously the use to be permitted by the lease should correspond to the use to which you will put the premises. In addition, the use should be as wide as possible. If it is too restrictive or expressed to be personal to you or to your specific type of business it will effectively stop you from disposing of your lease to any other who does not carry on precisely the same business as you. The above are general points to consider when negotiating your main lease. You should always consult your solicitor to advise you on the more specific considerations in your particular circumstances and to negotiate the content of your lease for you.