Negotiating a smart and flexible commercial lease
For any business owner, taking on a commercial lease is a big move, whether that be a new lease or a renewal of an existing one. It is essential when entering into a commercial lease that it is done so in a manner that protects you, and your business, especially for potential unforeseen eventualities. Whether you are a landlord or commercial tenant, expert legal advice is essential to ensure your best interests are protected; a crucial factor especially in periods of economic uncertainty. If you are considering entering into a new commercial lease, there are a number of key considerations you need to bear in mind, as follows.
Negotiation is expected
By simply accepting the default terms provided by a landlord, tenants lose the opportunity to negotiate favourable terms. When market conditions make it more difficult for landlords to rent property, you may be able to agree a lower monthly rent, a break-clause, a rent-free period, or a reduced rent deposit or future rent or service charge cap.
Your prospective landlord will be used to negotiating hard and will fully expect you to do so. A commercial property solicitor can prove vital when it comes to the negotiation process and can offer timely advice before you commit and sign to any formal Heads of Terms (if negotiated by a commercial agent) or directly with the landlord.
Many tenants only approach a solicitor after terms have been agreed, only to realise they could have got a better deal had they sought legal advice earlier. It is far more difficult to re-negotiate terms after being agreed so taking earlier advice may help you achieve more favourable terms and can prevent unnecessary issues that may arise further on in the transaction.
Seeking the most flexible arrangement
Break clauses provide an invaluable mechanism to end your commercial lease prior to the end of the natural term of your lease. Many tenants believe landlords will not be open to break clauses, but this is not necessarily the case, as ultimately the right may work to the landlord’s benefit as much as the tenants. That said, it is vital that the lease agreement be reviewed thoroughly as while a landlord may appear to have agreed to a break clause, they may also attach various conditions which are unfair or unrealistic. In some cases, onerous break clause conditions can render the right practically impossible.
As part of a flexible agreement, it is recommended that tenants consider the layout of the premises they are leasing at an early stage. It might be that initially the building is sufficiently set out as to support the business’ needs without any significant changes, but may require alterations at a later date, perhaps as stock levels increase, or new services are brought online. As such it is preferable to have some pre-agreed flexibility regarding how the premises are configured built into the lease, thereby saving time and administrative overhead if changes are required during the lease period. Landlords can sometimes be sensitive to alterations as they can have a material affect on the value of the property and the landlord will want to protect their interest in the building as much as possible. Tenants should therefore consider very early on whether they will need to carry out any structural and non-structural alterations as part of the initial fit-out. Consulting the landlord on the design and specification of any intended works is a vital process that cannot be overlooked.
In March 2018, the Royal Institution of Chartered Surveyors (RICS) issued revised guidance for those leasing business premises (Code for Leasing Business Premises in England and Wales), with one of its main aims being to ensure both parties can negotiate fair and flexible leases. The Code provides a valuable resource during the negotiation process for both landlord and tenant, leading to improved transparency and openness.
Control your costs
RICS also produce a Code of Practice entitled ‘Service Charges in Commercial Property: 3rd edition’, which can be followed to ensure fairness and transparency regarding your service charges. The guidance recommends that landlords provide best estimates and any other costs which the tenant will be expected to pay. Doing so not only enables the tenant to budget for such costs, but it also helps to ensure they are not hit with an unforeseen cost which may then jeopardise cashflow, and the ability to pay rent.
Within the terms of the commercial lease, it is also recommended that some certainty is included regarding rent increases. Rent reviews can strike fear into the heart of any tenant, but by negotiating a cap (e.g. one linked to the Consumer Price Index), you can put yourself in control, allowing you to plan your costs more effectively for the future.
Placing controls on service charges and rent increases provides a genuine win-win for both parties as any tenant in a strong cash position will provide their landlord with greater certainty of payment.
Repairs & dilapidations
The cost of repairs and dilapidations (damage which must be repaired by the tenant) can be another considerable risk to business cashflow. It is recommended you seek professional advice from a building surveyor before agreeing the lease as not only can any existing dilapidations be excluded from the liability of the repair by the tenant; you will have a better idea of the potential maintenance costs you will need to bear during the lease period. You probably won’t avoid all costs of repairs during your tenancy period, but by including favourable wording within the lease head of terms, you can relax in the knowledge your exposure is minimised.
Final words
Tenants and landlords often see commercial leases as a battle to be won, but this strategy is not necessarily conducive to the best long-term outcome. Because there are several points on which to negotiate, as outlined above, it is, therefore, possible for one party to ask for a compromise on one aspect of the agreement, but then concede on what they consider a less important matter. And this is a good thing – after all, it’s called ‘win-win’ for a reason.
Please note, this article does not constitute legal advice.
Hart Reade Solicitors are a full-service law firm with offices in offices in Eastbourne, Hailsham, Polegate and Meads. We hold a both a Lexcel and Conveyancing Quality Accreditation from the Law Society of England and Wales. To make an appointment with one of our commercial property solicitors, please phone our office on 01323 727 321.