Business Leases – Traps for the unwary
Taking out a business lease can be a significant commitment. Not only are they complex but they can last for years. With this in mind you need to ensure that you fully understand all of the terms and commitments involved. You should involve your lawyer as soon as you start discussing proposed lease terms with the landlord. They can then advise you early on of any risks involved or negotiations you should be making.
You can breakdown most commercial leases to the following fundamental provisions:-
You will need to consider whether additional expenditure will be required to comply with fire safety, asbestos and disability discrimination legislation. All these issues will impact upon the level of rent you should be agreeing to pay for the property.
As commercial property leases can run from just a few months to many years, there is a rent review clause to ensure the lease remains commercially viable.
Despite suggestions to the contrary and the threat of government intervention, there is little evidence of both upwards and downwards rent reviews. As such, the rent payable on review will stay the same in a falling market. However, a commercial property solicitor will ensure that the rent review provisions provide for a true market rent calculation and will resist any attempt by the landlord to introduce artificial provisions designed to provide a rental uplift on review.
Subletting and assignment
The ability to assign or sublet the property is valuable to the tenant as it provides for flexibility should you no longer want the property. Any ability to assign or sublet will be expressed as being subject to the landlord’s prior consent which cannot be unreasonably withheld.
Should GA be instructed, we would ensure that any such ability is not subject to overly onerous conditions. For example, a lease detailing that any subletting must maintain a rent which is no less than that payable under the main lease would make the property unlettable in a falling market, which is precisely when you will be looking to sublet rather than assign if you want to dispose of the property.
Length of lease, break clauses and renewals
Make sure the length of lease is appropriate for your business needs. Push for tenants’ break rights that give you an opportunity to end the lease at a time that suits your business. Beware however of the pre-conditions that need to be satisfied before you can break the lease e.g. adequate notice of intention or repairing covenants. As you can imagine, in the current economic climate, landlords are likely to seize upon any opportunity to defeat the right to break so as not to lose their tenants.
Ideally, you want the lease to be protected by the Landlord and Tenant Act 1954 which gives you statutory rights to renew at the end of the term.
An obligation to ‘keep the property in good repair’ includes an implied obligation to put it into good repair – even if it wasn’t in good repair at the time it was leased. The tenant will therefore be liable for any existing disrepair unless the repairing obligations are suitably qualified.
Ideally you will agree with the landlord that you are only required to keep the property in ‘no worse repair’ than it was in when the lease was entered into. This would be clearly evidenced by a photographic schedule of condition which is annexed to the lease. This could save you a significant amount of money come any claim for dilapidations at the end of the term.
Alterations and change of use
The lease will specify how you can use the property and also place restrictions on permitted signage and alterations. You need clear legal advice to ensure these provisions are not overly restrictive and the lease does not prohibit anything that you might need to do for your business purposes.
You should also be aware of any requirement to reinstate at the end of the term any alterations you have carried out during the term. The cost of putting the property back into its original condition could be a significant expense for the business, particularly if coupled with dilapidations as mentioned above. Reinstatement and disrepair are completely separate heads of expenditure.
In most cases the landlord will insure the property and the tenant reimburses the landlord for the insurance premium. The landlord then takes on the responsibility for the repair of any damage caused by an insured risk and the rent is suspended during any period that the tenant cannot use the property as the result of such damage.
As instructed advisors, we will ensure that the landlord’s obligation to reinstate and the rent suspension provisions are extended to include any damage by an uninsured risk.
If you are taking a lease of part of a building or a unit on an estate, the likelihood is the landlord will retain responsibility for maintaining common parts used with other occupiers of the building. The expenditure incurred by the landlord in providing these and other relevant services will be recovered from the tenants through a service charge.
You need a clear indication as to what the service charge is likely to be and whether any major expenditure is anticipated in the foreseeable future. Ideally you should seek an annual cap on the amount of service charge you can be required to pay in order to create certainty for budgeting purposes.
GA solicitors has one of the region’s most established commercial property teams. Ranked in Chambers & Partners UK as a leader in the field, I can advise on all the above issues, which if properly addressed, could save you significant money and stress over the term of the lease.
David Stone, partner