Entering a commercial lease? Tips for business owners

Deciding to grow or move your business is a big step and there are a number of things you should keep in mind prior to entering a deal. 

Whether you speak with an agent or just with the landlord directly, the first step is to agree the terms of the lease. 

If you don’t fully understand what you’re signing on the commercial lease, you are opening yourself up to negative consequences for you and your business.

Here are 9 top tips for when you’re entering a commercial lease…

Document the condition of the building and confirm your obligations

It’s common for the tenant to hold the responsibility for the repair of both the interior and sometimes even the exterior of the building. It’s advisable to document the state of repairs of the at the outset and to potentially get a surveyor in to comment.

By doing this, you are likely to avoid any future disputes with your landlord over repair obligations and this can be particularly useful if your lease is a longer-term lease as you may avoid huge repair costs. 

How much of the building are you leasing? 

Whether you are leasing the whole building or just a part of it will impact your repair obligations. For example, if you are just leasing a part, then the landlord is usually responsible for maintaining and repairing any common areas. 

Before you enter the lease, you should check who has the responsibility for the exterior of the building as a landlord would likely be responsible for this under a lease of part or if the property has multiple tenants. 

Do any alterations need to be made first? 

Thinking about any alterations you might want to make to the building and agreeing them with the landlord before entering the lease will save you from delays and potential issues later on. 

You may be required to prepare and supply plans you have for the property and this will also help your legal team to draft the lease agreement. You can seek the advice of workmen, contractors, and surveyors during the drafting process if necessary. 

If you fail to agree the changes with the landlord, then you will likely be in breach of your lease obligations by not getting the landlord’s prior consent, which will mean you would incur more legal fees in a litigation case. 

Rent review agreements

A rent review is the process of reviewing the rent after a fixed period of time, and the landlord deciding to up the rent or keep it the same. This is often dependent on the market rate at the time. 

A landlord would usually only request that requirement for a rent review if the lease is long-term, and they will generally want the review to be on a ‘upwards only’ basis. This means that when the market rent is falling, it will never be less than it was at the start of the lease term. 

Occasionally, some landlords and tenants agree to fixed increases, meaning they both know that at a certain time the rent will increase by a set amount despite the market or other external factors. 

Is there a break clause?

It might seem odd to consider leaving a lease when you’re just entering one, but it’s important to sort out how it will end and what it will entail. 

A lease is for a fixed period of time, however circumstances could leave you or the landlord needing to terminate the lease early. Including a break clause in your lease gives you and your business more flexibility. 

What are the ongoing costs involved? 

When you are entering a lease, it’s important to fully understand all of the costs involved, any money that may be payable by you during the lease and how the money is to be paid.

You can do this by doing the following:

• Request a full breakdown of the annual rent including whether it is to be paid annually, quarterly, monthly etc
• Request details of estimates service charges for maintenance
• Confirm if VAT is included in service charges
• Find out if the service charge is a fixed amount or variable
• Check your repair obligations for repairs and insurance

Stamp duty requirements

Stamp duty is payable when someone purchases a property, but it can also apply to someone entering into a lease. It’s good practice to check if you are required to pay stamp duty at the beginning of your lease. 

This will depend on the length of term and the rent payable. The HMRC website has a calculator which can give you an indication of how much you may have to pay.

Security of Tenure check

Security of Tenure refers to your right to occupy the lease after the term of the lease has expired. 

When you’re in negotiations for the terms of the lease, you may hear the phrase “opting out of the 1954 act” or “excluded lease”. Simply, this means that at the end of the term granted, the tenant (you) will have no statutory rights to request a new lease and therefore, will have to vacate the premises. However, if both parties agree to it, a new lease can be entered. 

To enter into a lease that excludes the automatic right for renewal, a formal declaration would need to be sworn by you.

Choose a legal professional

As each commercial lease can vary for each different business, it’s important to find a legal team that provide tailored advice to your situation. This will not only mean that the best options are being presented to you but also will help you to achieve the best possible outcome for you and your business. 

How can Hegarty help?

Our team of experts are on hand to help you with your entering your new commercial lease. We can ensure that everything is fully considered and that you feel fully informed to make the right decisions for you and your business.