These are the main ‘hidden costs’ you will need to budget for or renegotiate before you sign. Some are then covered in more detail below.
- Is VAT payable on the rent?
- How much are you going to need to spend on utilities such as gas and electricity?
- What are the applicable business rates?
- What is covered in any service charge?
- What are your responsibilities for repairs and maintenance? And will the building need major repairs that you could be liable for?
What are the insurance costs? Under some commercial leases the landlord pays the insurance, but the tenant then reimburses him. Usually this is not negotiable even if it costs more than the insurance you could have arranged yourself.
- Moving: What are the full costs of moving your business to these premises? It is not just removal costs but also the amount you will need to spend to fit out the premises so that you can run your business from them. On top of this there will be set up costs for IT, telephones, stationery and signage.
- Alterations: If the landlord and planning authorities have given permission, what costs do you need to allow for alterations to the premises (and do you need to allow for the cost of removing them in order to put the building back to its original condition at the end of the lease)?
- Rent reviews: Is there a risk that a lease that may seem good value now could become very expensive and difficult to get out of? Can better terms be negotiated now (before the balance of power shifts to the landlord once you have taken the lease)?
- Break clauses: Is the break clause one that you could actually comply with if you needed to? Also does it penalise you perhaps with rent still being payable for a period beyond the break? Does the lease allow the landlord to exercise a break clause before the end of the lease – forcing you to incur the costs of relocating your business and potentially causing a large disruption to your operations?
- Deposit: Make sure you understand the conditions relating to the rent deposit (the landlord’s security against you failing to pay the rent or comply with other terms of the lease). In particular make sure the lease is clear about the basis on which your deposit money will be returned to you and what happens if the landlord sells the premises to another landlord. You may want to consider negotiating to get interest paid to you on the deposit and that the landlord holds it in a way that it is protected if the landlord became insolvent (e.g. stakeholders account).
- Personal guarantee: If you are asked to give a personal guarantee, you should try to avoid this if possible. You need to be sure that the lease is clear about what the guarantee covers and when the landlord has the right to call on it and how it would affect you personally if this happened.