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Negotiating Commercial Leases – Opportunities and Pitfalls

Most businesses need physical premises from which to trade (even those who principally operate online). Therefore, being able to find premises in the right location, which fits your business and falls within your financial parameters is essential. So when you have found premises to rent, what are the main things you should consider when negotiating the lease terms?

Term

How long do you want to commit yourself to those premises?

For some businesses, there will be a very expensive and costly process in making the premises fit for its purpose (especially in the restaurant, retail or industrial sectors), therefore, will you be able to use the premises for long enough to justify the capital expenditure required?

On the flip side, do you need flexibility so that you can adjust your needs to cater for opportunities to grow or the risk of a downturn? Would an option to break the lease at a predetermined date be a good idea?

Rent

This is an obvious one but can you afford the rent if it will take time to build up your business from the new location?

Don’t be shy to ask for a rent-free period or to ask for a stepped rent so that your rent increases over a pre-agreed period (e.g. 50% of the agreed rent in the 1st year, 75% in the 2nd year and 100% in the third year).

Even if you are an established business, rent-free periods are an easy way for landlords to attract new tenants in an area where there is an oversupply of commercial properties. The point is experienced commercial landlords will be used to rent-free periods and will expect you to ask for one.

Rent Reviews

A rent review every 3 or 5 years is pretty standard and the most common method for dealing with rent reviews is for the parties to agree for any rent review to be agreed on the basis of Open Market Value (OMV). If this can’t be agreed by the parties, then you can agree for an independent surveyor to assess this at that time.

An alternative to OMV, is for the rent review to be calculated by way of reference to the Retail Prices Index (RPI) or the Consumer Prices Index (CPI). Both RPI and CPI are indices published by the Office for National Statistics as measures of inflation and therefore, as they are government figures, they are seen as uncontroversial ways of ensuring that the “real world” value of the rent doesn’t diminish. However, Landlords may be reluctant to accept a rent review on either a RPI or CPI basis because it won’t reflect any increased demand in the locality of the property which is pushing the open market rental value of the property above inflation.

There are other ways to negotiate rent reviews, so you may want to speak to an experienced lawyer or surveyor before committing yourself to any particular rent review methodology. Nonetheless, a landlord would normally want the rent review to be “upwards only”, which means that the rent will never fall below the rent payable immediately before the rent review regardless of whether the rent review is taking place on an OMV, RPI or CPI basis.

Extent of the Property and Repair

This may seem obvious but if you are taking a lease of the whole building, are you prepared to take on responsibility for damage to the roof or if there is subsidence?

If you are only taking on part of the building, what happens if a window is broken or there is burst water pipe? Is that your responsibility to repair or the Landlord’s?

In general, whatever falls within the extent of the property you are renting, will become your responsibility to repair, even if it is not in great condition at the outset. Therefore, if you are concerned about anything specifically, you need to raise this with the Landlord and agree who will take responsibility for it. There is always the option of agreeing that you must not let the property fall into any worse state than when you first took it on. This is often documented by way of a photographic schedule of condition.

Security of Tenure

Under a piece of legislation known as Part II of the Landlord and Tenant Act 1954, commercial occupiers often have an automatic right to ask their landlord for a new lease at the end of their lease. Some landlords don’t like this and want you to agree to exclude those protections from your lease. If this is the case, then take expert advice before agreeing to it as security of tenure is an important right and so, giving it up can cause you difficulties in the future.

Round Up

Having the right business premises can have a massive impact on your business so don’t be afraid to speak to expert lawyers who are experienced in helping you to negotiate the most appropriate terms for you. Linder Myers Solicitors are expert Commercial Property Lawyers with decades of experience. Please don’t hesitate to get in touch.

Should you require any further information, please do not hesitate to Call Us on 0800 042 0700, or email us on enquiries@lindermyers.co.uk

Find out more about our Commercial Property department
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