The Length of the lease and ending it early
You should seek to ensure that the lease gives you some flexibility if you outgrow the premises or you need to end the lease early. You could do this by agreeing a shorter term. Alternatively, if you would like the security of a longer term we could negotiate a break clause on your behalf enabling you to end the lease part way through it after giving for example six months prior notice to the Landlord.
You should have the right to transfer the lease to another tenant. However some landlords will require you to guarantee the new tenant’s ability to pay the rent under the lease. Such a guarantee should not be entered into lightly. If the new tenant defaults, the landlord could require you to pay rent and other expenditure for the remainder of the lease. Worse still, if the tenant is declared bankrupt or is wound up, the Landlord could ask to take the lease back for the remainder of the time it has left to run. In appropriate circumstances, we can assist you in attempts to avoid this if possible.
Similarly, we will seek to ensure that you can sublet the whole or part of the premises to give you more flexibility. Again you may not need all the space if business falls or it may be useful to sublet part to a business that complements yours.
You could seek to agree an initial rent free period. This could be helpful if you are just starting out in business or need some time to refit the premises before you can fully occupy them.
Most landlords ask that rent be paid quarterly in advance, but this can sometimes cause cash flow difficulties. If appropriate, we will seek to agree that rent is paid monthly in advance to ease the burden.
We always make early enquiries into whether you will need to pay VAT on the rent and any service charge. Most rents under commercial leases do not attract VAT but beware that some do. This may be a problem if you are not VAT registered and you cannot claim the VAT back.
The lease may allow the landlord to put the rent up part way through the term. Reviews are usually upwards only but we could seek to negotiate a clause to review the rent in line with the market rental of comparable local premises which could result in your rent reducing.
The rent review clause in the lease requires careful consideration. We will make sure any improvements or additions you make to the property are disregarded when setting the reviewed rent.
The definition of what you can use the property for in the lease can affect the rent review. If it is too wide then it can push up the figure. On the other hand if it is too restrictive it can reduce the rent on review but may cause you difficulties if you wish to assign the lease.
Personal Guarantees and Rent Deposits
Some landlords seek personal guarantees from directors of limited tenant companies. This defeats the object of limited liability so avoid them unless you have no other option.
You could offer a rent deposit instead. These are typically at least one quarters’ rent. We always advise that the rent deposit is recorded in a separate rent deposit deed specifying that the rent deposit money will be put in a separate designated account and is held on trust. This will protect the money in case the landlord goes bust.
The rent deposit deed should also describe the circumstances in which the landlord can draw on the money. Typically this is for failure to pay rent or repair the property under the terms of the lease.
We can seek to negotiate repayment of the rent deposit after for example a fixed time has passed and the landlord has not had to draw on the same or upon your business reaching certain profitability targets agreed at the start of the lease.
This is very important to get right or it could cost you dearly during the lease and when it comes to an end. Most leases require the tenant to keep the property in repair. This also has the effect of requiring you to put the property into repair. If the property is old and in a poor state of repair you could face a big repair bill because the lease will require you to hand back the property in accordance with its terms. Therefore if a door is hanging off at the start of the lease or if there is a leak in the roof, you have to repair it. Even new or recently refurbished properties can cause problems as they may come with “inherent defects” resulting from poor design or construction methods that may cause the need for repairs in the future.
We can advise and assist you to attempt to limit such obligations and risks. One way to do this is to produce a photographic schedule to attach to the lease noting the state of repair of the property and agreeing that you will not be required to put the property into any better state of repair than at the start of the lease as evidenced by the schedule. Alternatively we could remove any liability for inherent defects or for certain parts of the property such as the roof which could be costly to repair.
If you are leasing part of a building and are only responsible for part of the repairs, we will make sure that the landlord is required to repair parts of the building not covered under yours or any other lease. For example, you may not be required to repair the roof but you still need to be able to insist upon the landlord doing so.
A lease of part of a building or a of unit on an estate will often include a service charge to cover the landlords costs incurred in maintenance and repairs to the rest of the building, roads, common areas, cleaning, security and so on.
We will check what proportion of the entire service charge will apply to the property you are leasing and how this is calculated to ensure it is fair.
We will advise you as to whether the landlord can increase the service charge for example if other units in the same building or on an estate become vacant or under any other circumstances. We will try and negotiate a cap to the service charge so you are not faced with a large bill if the landlord needs to undertake substantial repairs to the building.
We will obtain previous years’ service charge accounts and ask if any large items of repair are envisaged by the landlord.
Security of Tenure
Unless specifically excluded under the terms of the lease, all commercial leases over 6 months in length are protected under the provisions of the Landlord and Tenant Act 1954. This provides that you will not automatically have to leave at the end of the lease unless the landlord serves a notice establishing one of a number of grounds described in the Act. These could include failure to pay the rent or the landlord needing the property back to develop or demolish.
The Act also allows you to ask the court to decide the rent under a new lease the landlord offers you if you cannot agree the same. This protects you from the landlord effectively forcing you out by inflating the rent to unacceptable levels.
We will advise whether or not the Landlord is offering you a lease that is protected under the Act. If the location of the premises is key to your business, it could be very important to have such protection.
The longer the term of the lease and the higher the rent, the more likely you are to have to pay Stamp Duty Land Tax on the lease. It is worked out on the rent paid during the term (plus any VAT) and generally any amount over £150,000 (subject to a calculation to arrive at what is called a Net Present Value) will attract Stamp Duty at 1%.
We can advise you on the most efficient length of term to avoid paying SDLT or seek to reduce the rent slightly if you are just over the threshold.
If the term of the lease is over 7 years, it will need to be registered at the Land Registry. Whilst this is not a bad thing in itself a fee will have to be paid to do so.
You may also need to pay for a professionally drawn scale plan of the property which is acceptable to the Land Registry. These plans can be quite expensive to produce.
Options to purchase/ rights of first refusal
You may want to have the right of first refusal to purchase the freehold of the premises if the Landlord decides to sell in the future or an option to require the landlord to sell to you after you have been a tenant for a fixed amount of time. This can be more cost efficient than paying rent and repairs on premises you intend to occupy for a long period of time. We can negotiate how the purchase price is to be decided and other important terms.
Heads of terms
It is important to seek to clarify and agree the main terms of the lease with the landlord before you are given a draft lease. Try to formulate a “Heads of Terms Agreement”. Although generally not legally binding, you can refer to this when negotiating the lease.
The above points are not exhaustive and each transaction will have its own particular areas of concern.
Please contact us if you are considering taking on a new lease or sublease, assigning an existing lease or taking on an assignment of an existing lease.
We can also assist tenants in negotiating schedule of dilapidations claims by landlords at the end of leases and attempt to reduce any amount claimed.
If you have any questions or require further advice, please contact Jeremy Redfern, Partner or Douglas Godwin, Partner at Parkinson Wright, Worcester Office, 01905 721600