QUICK GUIDE TO … NEGOTIATING THE TERMS OF A COMMERCIAL LEASE
Once you have found new premises for your business, you will need to negotiate the terms of the lease with the landlord. Whilst you may want to do this yourself, there are major advantages to using an experienced solicitor to do this on your behalf. We suggest that you gather information on the points below and then speak to your solicitor before agreeing to any terms of the lease.
The following is a list of the main commercial terms you will need to agree.
Rent
The annual rent (occupancy charge) can be calculated by multiplying the square footage by the cost per square foot.
Key points to check
- Find out the average rent for other similar properties in the vicinity (speak to your solicitor if you do not know).
- Most landlords expect tenants to pay rent for the next three months in advance. Ask if the landlord will allow you to pay rent monthly in advance.
- Ask if the landlord will charge Value Added Tax on the rent. If so, make sure you are able to reclaim the VAT.
- You may want to make changes to the premises, once you move in and to fit them out for your particular use. Most landlords will be willing to agree to give tenants a rent free period to compensate tenants for incurring this cost. Make sure the landlord will agree to this.
Service charge
If the premises form part of a much larger building (for example, a shop in a retail centre or an office in an office block), the landlord may also charge a service charge. A service charge would cover the cost of maintaining and repairing the shared areas of the larger building such as visitor areas, driveways, landscaped areas and common facilities.
Key points to check
- Ask the landlord to estimate the average year’s service charge and how this is calculated for the premises.
- Ask the landlord to confirm the service charge in each of the last three years. Ask to see the last three years’ sets of service charge accounts, so that you can check these figures.
- Ideally, you probably want the landlord to agree a cap on the amount of each year’s service charge. We suggest that you ask your solicitor to negotiate this point.
Other costs
Find out what other direct costs the tenant will have to pay. Typically, these will include:
- the annual insurance costs for the premises (the landlord usually insures the premises and re-charges the tenant)
- local authority commercial rates (the tenant usually pays these direct to the local authority)
- property taxes on the lease (the tenant will pay these; your solicitor can tell you how to keep these costs down)
- utility charges (electricity, telephone, gas, water, etc) (sometimes, the landlord provides these services, recharging them to the tenants; sometimes, the tenant pays for them direct).
Repairs and improvements of the premises
Most landlords will expect commercial tenants to make repairs and carry out maintenance to the premises. Repair and maintenance costs can be very expensive. We strongly recommend that you speak to your solicitor before agreeing to this. You may also need a surveyor to check out the condition of the premises.
Points to know
It is a good idea to ask the landlord to carry out any immediate repairs to the premises before you take on the lease. Who will pay for this work is an important question that needs to be negotiated.
Mechanical system repairs, maintenance, and replacements
Most landlords will want to pass responsibility for repair of mechanical systems inside the premises to their tenants. Again, this can be very expensive to tenants. You make a careful note of any expensive mechanical systems in the premises and pass this to your solicitor.
Duration of the lease
Leases of commercial premises nowadays seldom run for longer than 10 to 15 years. Tenants would usually expect to have the right to end the lease early (tenant break option) at, say, the start of year 5 of the lease. Find out the landlord’s attitude to this.
Points to know
You should speak to your solicitor before agreeing the duration of the lease or tenant break options with the landlords. Why? Because, by wording the lease in a particular way, you may be able to save substantially on property taxes.
Other terms of the lease
There are many other terms of the lease such as restrictions on transfers the tenants’ interest in the lease, restrictions on sub-letting, use restrictions, restrictions on alterations, signage and so on. See the Very Simple Guide to… Commercial Leases for more information on these terms.
We recommend that you ask your solicitor to negotiate the final terms of the commercial lease. Your solicitor can also help you save on property taxes and save you money in the longer term. For more information, you can contact Michael Dewar (0131 220 7605; michael.dewar@ccwlegal.co.uk) at CCW LLP.