By Charlotte Mackenzie, Associate Solicitor
You may be a new business looking for the ideal place on the high street to trade from, a manufacturer searching for the perfect unit on an industrial estate or a professional outfit in the services sector searching for a fully-serviced office suite. Whatever type of business you are, the terms of your lease could be vital to ensuring your success. This blog offers some key terms you may wish to consider when sitting at the negotiating table.
Rent
Starting with the obvious, you will want to ensure you will be charged a fair rent for the property, which is likely to be based on the open market rental value. If you have concerns as to whether the landlord is offering a reasonable rent, then depending on the proposed term length and any rent reviews, it may be prudent to appoint a surveyor that has knowledge of the local rental market to provide you with a valuation.
Check what other sums might be payable under the lease, which may include a service charge if the property is part of an estate, shopping centre or serviced office block. You may wish to confirm with the landlord what proportion of the total service charge you will be required to pay and request a copy of the last few years’ service charge accounts or budgets.
Any review of the rent is likely to be ‘upwards-only’ and based on the open market rent at the time of the review but could be linked to a commercial index such as the Retail Prices Index.
Rent-free period
If the property will require any alterations, re-decorating or your own fit out works before you can begin using the property, you might wish to negotiate an initial period of two to three months’ ‘rent free’, which will allow you to occupy the property to carry out the necessary works, without being burdened by the cost of the rent.
The landlord is likely to require that its consent to any such alterations is given in a formal written licence document, especially if they are substantial works, and it would be sensible to negotiate this alongside the lease.
Term length
This is greatly influenced by your business needs; a longer lease will provide certainty for the business to establish itself in the area but a shorter lease will offer more flexibility should the needs of the business change over time.
One option with a longer lease would be to seek a tenant’s right to break on a certain date on giving the landlord the requisite notice; but beware that time is usually of the essence when it comes to break dates and once the date has passed, the right will usually be lost. The landlord is also likely to seek to impose conditions on a tenant’s ability to break and your legal adviser will be able to tell you if these are reasonable.
Another option would be to ensure that the lease has good ‘alienability’, which includes the ability to assign it to a new tenant or sublet it to your own tenant, usually on similar terms.
You should also note that a lease of more than seven years will require registration at Land Registry and a fee will be payable for this depending on its rental value.
Repairing and insuring
A lease can be described as ‘fully repairing and insuring’ if the tenant will be solely responsible for keeping the property in good repair and paying for it to be insured. Such an obligation includes putting a property into a good state of repair if it is in disrepair at the start of the lease. A prudent tenant will inspect the property to ascertain any repair work that may be required during the term and may even commission a survey to establish any hidden works.
If the tenant’s repairing obligation is particularly onerous, you may wish to seek a reduction in rent, or some other assurance in the lease that you will not be required to rectify certain items. Ideally, this is done by way of a schedule of condition, which is usually a series of photographs annexed to the end of the lease by way of evidencing the state of repair of the property at the start of the lease, with a provision in the lease that the tenant is not required to put the property in any better state of repair than shown by the schedule of condition.
Permitted use
The landlord may wish to grant the lease strictly for a specific use, particularly if he has other interests in the vicinity and wishes to avoid any conflicts arising relating to competition. On the other hand, the landlord may be willing to offer some flexibility, allowing a broader use, or even a change of use with the landlord’s consent.
The more flexible a lease is in this regard, the greater the marketability of the property, which may be significant when determining its value on the open market at any rent review. Such flexibility could increase the potential for assigning or subletting the lease.
Security of tenure
You may have heard of terms such as ‘protected tenant’ or ‘holding over’. These relate to the security of tenure provisions located in Part II of the Landlord and Tenant Act 1954, which allow a tenant to remain in occupation of business premises after the contractual term has ended, providing the rent is continued to be paid in the usual way and accepted by the landlord. It also allows a tenant to request a new lease on substantially the same terms by following a statutory procedure, with limited circumstances in which the landlord may object.
Whether you are at the initial stages of negotiating a lease or have a draft lease that you would like to be reviewed or you wish to discuss any of the above aspects with Charlotte, please contact her at 01892 515022 or clm@cooperburnett.com
