What Is A Commercial Lease?
A commercial lease is a legally binding contract made between a landlord and a business tenant. Much like a residential tenancy, a commercial lease gives a tenant the right to use the specific property for a business or commercial activity for a period in exchange for money paid to the landlord.
Our top 10 tips.
The failure to effectively negotiate a desirable commercial lease will directly impact the success of your company. If you pay too much for rent, you might need to increase prices, or you might not be able to afford to invest in other areas of your business.
To help minimise the risk of this happening, our solicitors have put together a top ten list of factors to consider when negotiating a commercial lease to ensure the lease is in line with your company’s desires.
1. Ask for a rent-free period
It’s always worth at least asking for a rent-free period. Although it may sound too good to be true, you’ll be surprised at just how many landlords will agree to this.
The main reason a landlord will provide a rent-free period is as an incentive to attract commercial tenants. Furthermore, some landlords will offer a rent-free period to cover any repair or alteration costs that you as the tenant would otherwise need to pay.
2. Consider the duration of the term
The duration of the term is the length of time you will agree to occupy the property. Our solicitors strongly advise that you take time to consider how the current commercial lease term reflects your business’ future expansion plans.
There are pros and cons to both short-term and long-term leases. For example, if your business is just starting, you might consider a shorter-term lease because it offers your business the flexibility to move and expand. Whereas, if you are a large company that has a large workforce and wants long term security from the premises, then a long-term lease is a better option. But bear in mind that the shorter the term, the less flexibility you’re likely to have within the lease.
3. Avoid putting yourself down as the lessee
This might seem counter-intuitive, but if you put your own name down as the person taking out the commercial lease, you can expose yourself to significant personal liability. Ideally, you should sign any lease in the name of a separate limited company rather than in your own name.
As companies are treated as separate ‘legal entities’ in the eyes of the law, by not signing the lease in your name, the company instead becomes liable for paying the lease. This also means if you can’t afford to pay the lease, the company assumes the debt rather than you personally.
However, not all landlords will agree to this, especially if the company has little to no financial history. An experienced solicitor can help negotiate a compromise in this circumstance to try and ensure your name is not on the lease.
4. Avoid personal guarantees
In cases where the lease is taken on in the name of a limited company, the landlord may ask the directors of the company to provide personal guarantees. This goes against what you as the tenant are trying to achieve by having a limited liability company to trade through.
If the landlord is looking for some security and is insisting on including personal guarantees, it’s beneficial to negotiate a compromise with the help of a solicitor. You can offer the landlord a rent deposit (typically three months’ rent), which is given back to the commercial tenant on expiry of the lease, or before by agreement.
5. Negotiate repair obligations
A ‘full repairing lease’ means you will be responsible for all repairs to the property inside and out. This includes the structure and any rebuilding works. As a tenant, you should ideally only be liable for interior maintenance. The landlord should be the one who is responsible for the general maintenance of the structure.
Additionally, a ‘full repairing’ obligation might require the tenant to put the property in a better state than it was at the start of the lease. The tenant should negotiate a repair condition to be restricted to giving the property back in the condition it was at the beginning of the lease. This can be supported using a ‘schedule of condition’, which is a record of the state of the property from the beginning of the lease.
If the lease is particularly long, it may be worth having a building surveyor inspect the building to anticipate what the repair costs may be over the lifetime of the lease. If crucial (and likely expensive) works are due, you can negotiate on this point with the landlord, or ask that they undertake the works at their cost.
6. Ensure there’s a break clause
One of the essential elements to incorporate into a lease is a ‘break clause.’ A break clause gives the right for you to end the lease early by giving the landlord an agreed period of notice.
This is a beneficial clause to include, as it gives you the flexibility to terminate the lease. Economic factors and personal circumstances can impact your business, so if you wish to move into a different property, or things just don’t work out, you will have the security that you can end the lease.
Break clauses can be drafted to ensure only the tenant can execute it, offering security throughout the lease term. They can also be used to offer flexibility and cut short a long lease, in the event your business outgrows the property.
8. Look into a sub-letting clause
At the very beginning of the lease or as your business grows, you may consider sub-letting some of the premises to generate some additional income, or to offset the rental payment. This is especially true if you take out a lease on a property larger than you require.
This sub-letting clause is important to retain flexibility, especially if your business operates in a particularly volatile industry. If your landlord is not willing to accept a break clause, then this may be the next best option for your business.
9. Don’t pay the landlords legal costs
You don’t have to pay the landlord’s legal fees! This is not standard practice. Each party should pay their legal fees where possible.
If the landlord insists this is the case, consider how much these costs might be in relation to the overall cost of the lease over the entire period before rejecting this outright.
Remember that all the terms of the lease are capable of being negotiated. For this reason, it’s vital to instruct a qualified commercial property solicitor to help secure your company a favourable commercial lease.
10. Seek legal advice for a commercial lease
Trying to secure a beneficial commercial lease is a challenging and complicated process that will include a lot of negotiation. This is where a qualified solicitor is needed.
As a result, it’s recommended that you seek a solicitor to review the lease to avoid any disruptions an unfavourable commercial lease can have on your business.
Appointing a solicitor at the beginning of the negotiation process will ensure the lease is in line with your company’s desires. Furthermore, even if the commercial lease is fair, you will at least gain that peace of mind that you have an excellent commercial lease agreement.