Top Tips for Business Tenants

Whether you are starting your own business, expanding or getting ready to change locations for your current business, you are likely at some point to consider entering into a commercial lease. When it comes to commercial lease negotiation, or renewal, a lack of knowledge can cost your business dearly. Property costs can be a significant part of your overheads and therefore it is important to make informed decisions during lease negotiation to improve your profitability.

Friday 31 July 2015

Whether you are starting your own business, expanding or getting ready to change locations for your current business, you are likely at some point to consider entering into a commercial lease. When it comes to commercial lease negotiation, or renewal, a lack of knowledge can cost your business dearly. Property costs can be a significant part of your overheads and therefore it is important to make informed decisions during lease negotiation to improve your profitability.

Once you have found your perfect location and are offered a lease as well as organising the logistics of moving and fitting out your new premises it is important that you seek the right advice before signing your lease. Unfortunately many prospective tenants generally fail to engage with their commercial property solicitor early enough, leading to unexpected costs and time delays.

We have highlighted a few tips you may want to consider when negotiating principal terms which will help you to avoid making those all too common and costly mistakes….

Heads of Terms

Usually after you have viewed the property and submitted an offer, the agent drafts a ‘heads of terms’ document. The ‘heads of terms’ detail the main commercial points agreed between the parties and is circulated to the lawyers as the starting point for them to draft the legal documentation. You should therefore ensure that as many of the principal terms as possible are negotiated from the outset. The terms will be largely dictated by the strength of the negotiating parties’ respective positions but you should make sure you are able to commit to them and they fit in with your business plan.

Length of Lease

It is important to make sure the length of the lease for your commercial premises is adequate for your business needs. If it is too short you may have to relocate early in the business; potentially affecting goodwill. However if you are considering a long term arrangement, you should still hedge your bets and negotiate a break clause. At the very least you should also seek the right to assign or sub-let in the event that the Premises are no longer required for your business needs. You should also be aware of the impact of the Business Tenancies (Northern Ireland) Order 1996 on your lease. In Northern Ireland most business tenants have security of tenure i.e. the right to renew a tenancy when it comes to an end, under the terms of the 1996 Order. The procedures under the 1996 Order to bring a commercial lease to an end must be strictly adhered to and you should always seek specialist advice before serving or responding to any notices served pursuant to the 1996 Order.

Rent

Tenants are frequently surprised when we report to them on the terms of the lease and confirm what the landlord will collect, as rent. Often there is more payable than just the basic rent; including, buildings insurance, service charges, utility costs and so on. You should also factor in the amount of the business rates and you will need to check if the landlord has opted in to charge VAT on the rent. Such costs can significantly increase your overheads. It is not unusual for the Landlord to seek a rent deposit or guarantor, particularly if you are a start-up, but it possible in some circumstances to negotiate an early release of a deposit or guarantor once you have demonstrated financial stability. Tenants should always seek to negotiate a rent free period; whether you are setting up a new business or seeking new premises for your existing business there will usually be a period required to fit out and settle in.

Rent Review

Leases of terms longer than 5 years normally contain rent review clauses which allow the Landlord to initiate a rent review at set intervals; usually this is an upward only review; so do not expect your rent to go down! It is important to fully understand the basis on which the rent will be reviewed i.e. is it calculated against open market (i.e. a comparator of other like properties in the area) or linked to retail price index – RPI (i.e. inflation).

Use

It is important to establish at the outset that the property has planning permission for your proposed use as any planning applications which may be required for a change of use can delay matters; leading to increased costs and generally Landlord’s

the scope of any works which you require to do to the Property and establish whether you need building control or other approvals to carry out those works.

Repairs

Most commercial leases are referred to as “FRI” – full repairing and insuring leases. Repairing obligations can be onerous and extensive. Serious consideration should be given to getting a survey of the property in order to understand the potential repairing liability you may be exposing yourself to. A ‘schedule of condition’ attached to the lease with evidence of the condition of the premises when signing the lease, including photographs of the premises could save you considerable money when the lease term comes to an end when the landlord seeks to recover the costs of repair. A proficient commercial property solicitor will negotiate an amendment to the repair covenants to limit your liability.

By consulting your commercial property solicitor at an early stage you will enter the transaction knowing most if not all the risks and benefits, avoid potential difficulties and negotiate much better terms for your business.

If you require any further advices please contact Julie Galbraith, Partner, C & H Jefferson, Solicitors.

Julie Galbraith

Partner