Commercial Leases: Top Tips
If you own your own business the chances are that you have, or will, enter into a commercial lease at some time during your business life. There is a common misconception among people who have not taken a commercial lease before that as "it is only a lease" then one does not need to take it as seriously as you would if you were buying a property outright. However, for those of you who have or are doing so you will no doubt appreciate what a big commitment and potential liability it is and should not be entered into lightly.
There is no standard form of lease. Each lease is different and must be reviewed carefully. Generally speaking a lease is prepared by the Landlord or their solicitor and will be weighed heavily in their favour. If you are taking on a new lease then your solicitor will have the opportunity to check it through carefully and seek to make amendments in order to try and minimise your liability. Please note however that this opportunity will not arise if you are purchasing a business, which includes a lease that is already in existence and is being transferred over to you as part of the transaction.
In such cases a Landlord does not need to re-negotiate the terms of the lease as he already has a Tenant 'on the hook' so to speak. It is still nevertheless very important for your solicitor to check the terms of the lease and carry out due diligence on the property to ensure that you know what you are letting yourself into.
Reduce liability as much as possible
- Length of the Lease - The proposed length of the Lease needs to be considered quite carefully as too greater length increases your financial exposure under the Lease, whilst a too short lease will not give you the security you may require. If you are acquiring a lease as part of a business purchase which has less than 5 years left to run then you may want to ask the Landlord if he would be prepared to grant you a new longer lease on the same terms and conditions as you do not want to be spending thousands of pounds on acquiring a business which has only a few years left to run.
- As a business you will have what is known as security of tenure protection. This means at the end of the term you will have an automatic right to apply for a new lease on the same terms and conditions as the existing lease and there are only certain limited grounds which a Landlord can oppose such an application - the main ones are if a tenant has been in breach of the terms of the lease or the landlord wants to redevelop the premises or occupy it for himself. Now, having said this, a lease can be excluded from having this protection provided that an Exclusion Notice is served on the Tenant before the lease commenced. If such a Notice has been served it will be mentioned in the Lease and so therefore this will need to be checked.
- Attempt to take the Lease in the name of your Company - This would be significantly helpful because it would reduce your personal liability. Having said this if you are trying to take the lease in the name of a start-up company that has been trading less than 3 years and thus no proven track record then you will find that invariably the Landlord will ask 1 or 2 directors of that company to stand as personal guarantors - in such a case an alternative proposal to put to the Landlord is to offer them a rent deposit - this does tie-up cash but does mean that your personal liability is capped.
- Ensure that there are adequate provisions to transfer the Lease - A vital requirement in any Lease. You need to have the ability to assign or sub-let the Lease, as anything can happen with your business plan or within your own life, which means you want to get out of your obligations under the Lease. What you will need to be aware of however is that it is standard for there to be a provision in the Lease which says that the outgoing tenant must stand as guarantor for the incoming tenant for so long as that tenant remains the tenant under the lease. Once he transfers the lease over or the lease is terminated then the outgoing tenant will be off the hook. Although this is onerous it is I am afraid standard.
- Request a break clause - This will give you the ability to simply terminate the Lease at a fixed point during the term and thus giving you greater flexibility.
Carry out due diligence on the premises
- You will be responsible for repairing the Premises - Most commercial leases are FRI leases which stands for Full Repairing and Insuring leases. This means that a Tenant will be responsible for keeping the property in good repair as well as for the cost of insuring the Premises. By full repair it means a Tenant will be responsible for all parts of the premises including the exterior and the structure. It also may mean that a Tenant could be required to put things right even if the disrepair was in existence when he took the property on.
This could potentially be very expensive and we would always recommend that you instruct a Surveyor to inspect the Premises and draw up a Schedule of Condition. We would then seek to put a provision in the Lease stating that the Tenant is not required to put the Premises in any better condition than at the commencement of the Lease as evidenced by the Schedule of Condition which can then be attached to the Lease.
If you are taking on a lease that is already in existence, as part of a business acquisition, you cannot obviously make any changes to the Leases. However, we would still recommend you carry out a Survey and if the property is in disrepair request that the Seller carry out those repairs before purchase or, alternative, estimate the costs of the repairs and seek to deduct them from the purchase price.
- Is the Premises included within an Estate? - If so then no doubt that the Tenant will be required to pay a Service Charge as a contribution to the cost of the common services such as maintenance of estate roads, lighting and landscaping. If there is a Service Charge then generally each unit on an estate will be liable to pay a proportion determined by its size. The obligation will be open ended and so try to ensure there is a cap put on it.
- How do you access the Premises? - Check how you can gain access to the Premises. If your Premises cannot be accessed by a public road you will need to check that there are adequate rights of way in place.
- Does the Premises have the planning permission for your intended use? This is significant because ordinarily the Landlord will give no warranty that the Premises has the necessary planning permission and the onus will be on the Tenant to ensure that it does.
For further advice on commercial property matters, please contact a member of our commercial property team.