A commercial lease is a legally binding contract made between a landlord and a business tenant. Similar to a residential tenancy, a commercial lease grants the tenant the right to use a specific property for a period of time in exchange for rent payments to the landlord.
Failure to effectively negotiate a good commercial lease will have a negative influence on your company’s success. If you pay an excessive amount for rent, you may need to raise prices or be unable to invest in other areas of your business. In this article, Negotiating Commercial Lease, we take a look at the process and mechanism involved.
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Are Commercial Leases actually negotiable?
Yes, it is often possible to successfully negotiate a commercial lease. However, the extent to which a tenant is able to do so depends on a number of factors. Key to this is the relative bargaining power of the parties. A tenant should consider the leverage they possess by considering:
Is the local market robust, or do properties remain on the market for an extended period of time before being rented? Are there available alternative properties that meet the requirements?
The nature of the property you wish to acquire; is it part of a large, popular development or a less desirable property that may have been vacant for a while?
How does the scale of your business compare to the landlord’s business or property portfolio? If you are a desirable tenant, this could go a long way.
Before entering into negotiations, it is advisable to investigate the local market, learn about the landlord, consult with a number of real estate agents, and retain the services of competent advisors, such as solicitors and surveyors.
How to negotiate a commercial lease
What is the term of the lease?
The length of the lease should be appropriate for the demands of the company. While a longer lease might make sense for an established business that needs long-term security from the location, a shorter lease might be better for a startup or a company that needs more flexibility.
In any scenario, the tenant should make sure their lease is safeguarded by the Landlord and Tenant Act of 1954, which grants them the automatic right, with some restrictions, to extend their lease at the conclusion of the term.
However, in order to maintain flexibility at the conclusion of the term, a landlord would choose to include an exclusion of such rights in the lease. As a result, early in the process, both parties must discuss and decide on the lease’s duration.
Try and include a rent free period.
It’s usually worthwhile to request a rent-free period. It might sound unrealistic, but many landlords will agree to this so it’s worthwhile asking.
A landlord will mostly provide a rent-free period as a marketing ploy to draw in business tenants. In addition, some landlords will provide a rent-free period to cover any expenses that you, the tenant, would normally be responsible for paying for repairs or modifications.
Ensure there is a break clause in the lease.
A “break clause” is one of the most important things to include in a lease. With a break clause, you can terminate the lease early by giving the landlord the predetermined amount of notice.
Having this condition offers you the flexibility to end the lease, which is a great benefit. Your business may be impacted by personal or financial situations, so you will have the assurance of being able to terminate the lease if things don’t work out or if you decide to move into a different building.
Break provisions provide security for the duration of the lease by guaranteeing that only the tenant may execute them. Additionally, they can be used to provide flexibility and end a long lease early if your company outgrows the space.
Consider rights to transfer or sublet the lease.
Most commercial leases allow the tenant, with the landlord’s permission, sublet the property or transfer the lease to another business or tenant.
The landlord may impose requirements that must be fulfilled or provide justification for their right to refuse permission, but these must be reasonable. These prerequisites could include the new tenant’s sound financial standing and the rent being paid on time.
In order to ensure that the new tenant will fulfil their obligations, the departing tenant will typically need to sign a statutory guarantee with the landlord.
Negotiate your obligations to repair.
If the lease is “full repairing,” you will oversee all internal and external property repairs. This includes the structure and any rebuilding works. Ideally, your responsibility as a tenant should be limited to interior maintenance. The person in charge of the building’s general upkeep should be be the landlord.
Furthermore, a “full repairing” requirement may obligate the tenant to restore the property to its pre-lease condition. To be limited to returning the property to its pre-lease state, the tenant should work out a repair condition with the landlord. A “schedule of condition,” which is an account of the property’s condition at the start of the lease, might be used to substantiate this.
It could be worthwhile to have a building surveyor assess the building if the lease is very long in order to estimate potential repair expenditures. If important (and probably costly) repairs need to be done, you can work out a deal with the landlord or request that they pay for the repairs themselves.
Avoid personal guarantees at all costs.
When a limited company signs a lease, the landlord has the right to request personal guarantees from the business’s directors. This defeats the purpose of establishing a limited liability company.
It is advantageous to work out a settlement with the assistance of a solicitor if the landlord is demanding personal guarantees and is searching for some security. You may send the landlord a rent deposit (usually equivalent to three months’ rent), which will be returned to the business tenant at the end of the lease or earlier if mutually agreed upon.
Are you allowed to alter the property?
Although structural changes are typically prohibited under the lease, the tenant should be prepared to request the ability to make interior, non-structural changes. The tenant may be required by the landlord to obtain permission each time.
Prior to the start of the lease, it is crucial that the tenant obtain permission for any first modifications and fit-outs.
Be aware of any security of tenure
According to the Landlord and Tenant Act of 1954, the tenant in a commercial lease is presumed to have “security of tenure.” Security of tenure refers to the tenant’s right to continue occupying the business space after the initial lease term expires as well as the right to extend the lease. This implies that in the event of a renewal, you effectively get first refusal on the property.
Only leases longer than seven years are eligible for the security of tenure, however, some landlords might urge you to waive it—particularly if the neighbourhood is being redeveloped.
You must obtain expert legal advice if you are requested to sign a commercial lease that is not covered by the Landlord and Tenant Act. Before you consent to give up these rights, an experienced solicitor will make sure you are completely aware of the repercussions.
Don’t get bullied into paying the landlord’s legal fees.
You are not obliged to pay the landlord’s legal costs and it is not customary to do this. Where feasible, each party should cover their own legal costs.
If the landlord is adamant that this is the case, before you reject this completely, think about how much these fees might add up to the total cost of the lease over the duration of the agreement.
Keep in mind that you can negotiate any and all of the lease’s terms. This is why hiring an experienced commercial property solicitor is essential to assisting your business in obtaining a good commercial lease.
How we can help
We have a proven track record of helping clients with negotiating their commercial leases. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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How to Contact Our Commercial Property Solicitors
You need to be well-informed about the issues and possible implications of negotiating a commercial lease. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Commercial Property solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well-known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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