Starting a new business can be a daunting prospect, with numerous issues to overcome in order to ensure the smooth transition from fledgling entity to a successful, profitable company. Taking your first commercial premises can be an integral part of this process, bringing its own challenges and obstacles.
Taking commercial space is an exciting step for any business, but it’s unfortunately very easy to make mistakes that could cost the business dearly in the future. Not knowing how to negotiate a commercial lease is stressful for any business owner. However, with the right advice, entrepreneurs can avoid common pitfalls, securing a deal that’s right for their business, with the appropriate safeguards necessary for an ambitious start-up:
#1 – Do your homework and avoid hasty decisions
The first goal is to identify the property that is right for your business – there is a whole host of criteria to consider, some more obvious than others. As well as location and sq. ft. it’s worth taking the time to speak to any other occupiers about their experience. We often speak with business owners who have failed to dig deeper than the façade and the information they’re presented with – you could be avoiding an expensive ordeal down the line.
#2 – Negotiate a comprehensive set of terms
Once a property has been identified, the agent will assist in helping you negotiate a commercial lease. The negotiation of a set of “heads of terms” (a document prepared at the outset of a transaction outlining the terms agreed between the parties) is imperative and is the opportunity for you to negotiate the best deal available.
It’s vital that any requirements you have are factored in at this point (key elements typically might include the lease duration, rent amount, rent escalation clauses, maintenance responsibilities, and any special provisions or concessions) as otherwise it will be much more difficult to negotiate additional elements once terms have been finalised and lawyers instructed.
#3 – Consider which entity is to take the new lease
The entity which takes the new lease will be “on the hook” for all the associated tenant liabilities, including payment of rent, the service charge and ancillary payments, plus any liabilities for dilapidations and such matters. With this in mind, you should also consider as to whether to take the lease in a newly incorporated limited company, rather than – in the case of a sole trader – your own name. This will avoid being held personally reliable for such obligations.
#4 – Push for a rent-free period/appropriate rent incentive
Depending on the desirability of the property, levels of interest and current market trends, tenants are often able to negotiate a rent-free period or associated rent incentive (for example, a period where they will pay a “half rent”) in lieu of the fact that they may need to fit out the property.
Your instructed agent will be able to advise on the likelihood of negotiating such an incentive, however it is certainly worth asking the question – where possible you want to avoid paying rent when you are still fitting the unit out.
#5 – Flexibility, termination and ability to ‘deal’
As a start-up entity, you have no way of knowing in which direction your new business will go. You may find that the business grows rapidly and that you quickly require bigger premises to support such growth. Conversely, you may find that things do not go so well, and that you no longer require as much space or wish to terminate the letting in its entirety. As such it is important to retain as much flexibility as possible. It is advisable to try and negotiate a break clause, either a tenant only break right at a specific point (for example, after three years of a five-year lease term) or better still, a rolling break right, which gives you the ability to terminate at any time after a given date.
It’s also important to consider how you’re permitted to “deal” with the lease. If the property is potentially divisible, it is certainly advisable to try and negotiate the ability to sublet part to a third-party tenant, which would then enable you to “hive off” part of the unit and recover some of your liabilities in relation to it.
#6 – Consider repairing liabilities and protect against onerous obligations
You need to be sure that you are not signing up to lease with an overly onerous repairing liability. To protect against this, it is important, where a property is not in full repair, that you always seek to agree a schedule of condition to be attached to the lease. This shows the state of repair of the property at the date you take your lease, with an associated lease clause, meaning you’re only obliged to put the property back into the state of repair as evidenced by the schedule.
#7 – Consider reinstatement when making alterations
Typically, commercial leases allow tenants to make internal non-structural alterations with landlord’s consent, and often allow the erection of internal partitioning without the need to obtain consent at all. It is important to ensure that where fit-out works are required in order to operate from the premises, landlord’s consent is obtained as part of the initial transaction and that you don’t end up picking up the tab for the landlord’s legal costs in preparing a licence to document such consent.
Always bear in mind that landlords will in likelihood require you to reinstate the premises at lease expiry. This is particularly important to bear in mind where works are significant as removal will be at your cost.
#8 – Seek to agree a cap on additional charges
If, for example, you are taking a lease of a multi-let building, there will likely be common areas and you will in all likelihood be required to contribute toward the cost of maintenance/insurance of the same. Where possible, it is advisable to try and cap such contributions at a fixed figure, so that you know your liability cannot go above that figure. As a start-up business, it’s imperative to keep strict control of your costs and clearly you want to avoid any unexpectedly high liabilities.
#9 – Be aware of SDLT and additional post completion costs
Depending on the length of term and annual rent you agree for the property, it is possible that the lease will generate a stamp duty land tax liability. Normally, SDLT kicks in on lease premiums / transfer values or ‘Net present value of rent’ when these costs rise above £150,001. There are exemptions available, but it is a complex subject and as such it’s important that you take professional advice on these possible liabilities in order that you can factor them in when working out your costings.
In addition, if your lease is over seven years in length it will require registration at the Land Registry, for which there is a registration fee payable.
#10 – Take professional advice
We would always recommend that you instruct a competitive and reputable commercial solicitor who will ensure that these points (and more) are picked up during the negotiation process and that your interests are properly protected.
Negotiating a commercial lease agreement is a crucial process for businesses seeking space for their operations which can significantly impact a business’s bottom line and operational flexibility. Businesses should carefully review and understand the lease terms, seek legal counsel if necessary, and consider factors such as location, space requirements, and budget constraints. Successful negotiations can lead to a lease agreement that suits your business’s needs and goals, while also helping to mitigate potential risks and disputes during the lease term.
The above points provide a broad flavour of the key elements that need to be considered when you want to negotiate a commercial lease.
Simon Maddox is a real estate partner at JMW Solicitors