One of the most significant costs for any business is rent. It is important for profit margins to ensure the rent and occupational cost is minimised, either at the outset of a new lease, or on a rent review of existing premises.
Other lease terms are also important – check the length of term, repair responsibility, restrictions on use, ability to assign (sell) the lease, and the provisions for reviewing the rent. Business leases are complex and carry significant responsibilities for landlord and tenant.
In the current market, tenants are in a strong bargaining position as property owners and landlords suffer the ill effects of the recession, with vacant premises and declining rents.
Owens offers advice on what to negotiate in your terms and conditions.
How much rent should I pay?
When taking a new lease, tenants should look at alternative premises in the area. If there is anything suitable, they can play one landlord off against another and drive a hard bargain.
Tenants may also be able to obtain a rent-free period or a capital contribution from the landlord, particularly if capital expenditure is required for fitting out the premises or carrying out repairs or improvements.
Attention should be paid to the terms of review throughout the duration of the lease, so as to reflect the initial deal between landlord and tenant. If the premises are taken in poor condition, consider how repair and improvement works are reflected in the rent review provisions.
On review, the rent is revised, taking into account the terms of the lease and comparable rents in the area. If you are unable to negotiate a revised rent, the lease will normally contain provisions for referral to either an independent expert or arbitrator.
A potential tenant is advised to take professional advice before taking a lease to find out which one is most appropriate in the circumstances.
What length of lease should I take?
A number of matters need to be considered. How long do you intend to trade from the premises? A short lease will give you the advantage of restricting the contractual liability, but limit your guaranteed right of occupation.
However, as a business you have the right to a further tenancy at the end of the agreement, although the landlord can regain possession on a limited number of grounds.
If you are making a significant investment in the premises, you will probably require a longer lease to obtain a return on that expenditure.
If the intention, at some stage, is to sell the business and assign the lease, then a reasonable lease term will be required.
Other lease terms
Matters such as who is responsible for repair and maintenance of the property, decoration and insurance, are all important issues.
The ability to assign the lease, i.e. transfer it to another party, and sub-let the premises, are also key considerations. It is vital that these terms are considered alongside the rent.
Can my rent go down as well as up?
The lease document will state at what frequency the rent can be reviewed, and on what basis. Historically, most commercial leases have upward-only rent review provisions.
However, with a more challenging economic environment and external pressures, there has been a shift with many leases providing for downward and upward reviews.
Am I bound by lease terms throughout the duration of the lease?
Yes. A lease is a contractual document binding both landlord and tenant. However, landlords and tenants often have to take a pragmatic view, particularly where one of the parties is facing financial hardship or difficulties.
Many tenants in today’s market have been able to obtain concessions from their landlord, either by way of a reduced rent, short-term rent holiday or change of frequency of rent payments. The key is to have an open and continuing dialogue with your landlord.
Useful links
The Royal Institution of Chartered Surveyors enables consumers to research surveyors in a particular area and offers free helplines.
The Law Society represents solicitors in England and Wales. The website also offers a searchable database of solicitors by location and specialism.
Stephen Owens has more than 25 years’ experience in the licensed property sector and is a Fellow of the Royal Institution of Chartered Surveyors (RICS) and Associate Member of the Chartered Institute of Arbitrators and on the RICS Panel of Arbitrators and Panel of Independent Experts.