Legal: Negotiating commercial leases

Partner at commercial property law firm Ratio Law Joanna Norris

Joanna Norris, partner at commercial property law firm Ratio Law, offers advice

Taking the plunge and leasing premises for a new, expanding or relocating business can be daunting, but should also be exciting and is often the mark of a business moving upwards. Many of the clauses contained within a commercial lease are open to negotiation, and in fact solicitors managing lease transactions will fully expect both sides to suggest alterations to the draft agreement. The final contract will usually be a result of give and take on both sides.

Showrooms are usually in prominent positions where they can be found easily and seen by passing trade, and accordingly carry a premium. The placement of a workshop is less important, but adequate parking for staff and delivery vehicles may be a consideration. Location and suitability can both be used as negotiating point with regards to both rent and other clauses within the lease.

Rent and duration

A commercial property lease is a significant liability and investment both in terms of cost and time; often three, five or even 10 years in duration. For this reason it's important to consider affordability for the business both now, and in the longer term. Although it's impossible to predict the future, it should be relatively straightforward to identify the business' strengths and weaknesses, busy and quiet periods and plan accordingly.

Rent reviews

A rent review part-way through the lease will usually enable the landlord to raise the rent (unfortunately it rarely works the other way). The level of increase may be drafted into the lease, or provision for calculating it may be based upon the Retail Prices Index or an agreed market value typically determined by an external expert at the review date.

Break clauses

Many leases contain a break clause, enabling the tenant or landlord to exit before the end of the term. However, they are often onerous in their operation, so it's important to understand exactly how and when the clause can be executed. It is also sensible to try to get a break clause added during negotiations if the draft lease doesn't contain one.

Repair and dilapidations

Check the wording of the lease carefully for the tenant's obligations with regards to the state of the building. Particular things to look out for include responsibility for the roof, plumbing and heating, and car parking areas. If the lease is for a space within a building, it's also sensible to check that somebody has responsibility for areas that fall outside of the scope of the lease, but affect its use – such as access routes and shared spaces. Most retailers will expect to make additions and alterations to bring new premises up to standard, with common improvements including stud walls, new flooring, decorations, and separate staff areas. Kitchen and bathroom retailers in particular will want flexibility to change their displays on a regular basis. Once again the lease should be carefully checked for limitations on what can be done, whether landlord consent is needed, and equally importantly the extent to which the tenant will be required to 'make good' at the conclusion of the lease.

Alienation

An alienation clause allows the tenant to dispose of the lease during the term – by sub-letting or transferring it to a third party. Including an alienation clause may act as insurance against changing circumstances, and enable the tenant to avoid the possibility of retaining responsibility for a lease the business can no longer afford.

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