Ten key negotiating points when taking a new commercial lease
When a landlord and tenant try to settle the terms for a new commercial lease, each party will have clear objectives. The landlord wants a secure income stream and confidence that the property will be left in good condition at the end of the lease. The tenant wants freedom to run the business without interference, to control costs as much as possible and to have some flexibility if their needs change. A well-negotiated lease will recognise these different perspectives and find a balance between them.
‘As we start rebuilding our economy, there is a greater understanding that landlords and tenants need to work together,’ explains Darren Millis, Partner in the Commercial Property team. ‘A lease negotiation should not be a battle, and a good commercial property lawyer can help you secure the best deal.’
While there are many potential points of negotiation in a commercial lease, here are ten key ones to remember.
1. Rent free periods
Landlords will often agree to a rent-free period at the start of a new lease as an incentive to the tenant. This could give you a valuable bit of breathing space to get established in new premises, especially if you need to spend money on fitting out. In the current market, landlords are keen to secure good tenants, so it is well worth pushing for the longest rent-free period you can get.
2. Break clauses
Your new commercial lease will be granted for a fixed period and you will not be able to end it early unless you negotiate a break clause. You may be offered a one-off right to end the lease, for example at the end of a particular year of the term; or you may be able to get a rolling break right, which you can use at various points during the lease.
The landlord may want to impose conditions which you must satisfy before you can break the lease, for example complying with all of your obligations up to the break date. Your solicitor will try to limit this to paying any rent due and leaving the property empty.
3. Repairing obligation
The usual starting point is that the tenant must keep the premises in good repair, so you would have to maintain it and fix any damage unless it was covered by the landlord’s insurance. If the premises are not in a great condition to start with or you are taking a very short lease, you could try to limit your obligation to keeping them in no worse state than they are in at present. You would then agree a schedule of condition with your landlord, with photographs and written details, which you can use as a benchmark later.
4. Rights to transfer the lease to someone else or to sublet the property
As with all aspects of your business, you will want as much flexibility as possible if you no longer want or need to occupy the premises. Most leases allow the tenant to transfer the lease to another business or to sub-let, but only with the landlord’s consent. By law, the landlord must act reasonably but they are allowed to impose conditions setting out when they may refuse consent. Your solicitor will try to limit these to you being up to date with the rent, and the new tenant or subtenant being financially strong enough to take on the lease obligations. In some cases, you may need to enter into a statutory guarantee that if the new tenant does not meet the lease obligations you will do so.
5. Rights to alter the property
You should make sure you have whatever rights you need to alter the property to suit your business. The lease will usually prohibit structural alterations, but you should ask for the right to make internal, non-structural alterations. You may have to get landlord’s consent each time, although they may accept that consent is not necessary as long as you keep the landlord informed.
6. Obligations at the end of the lease
The landlord will want you to leave the property in good condition, so it can easily be re-let. If you have made any alterations during the lease, the starting point is that you will have to remove them. It is worth discussing this when you are negotiating the lease, because you may be able to leave some things in place. This would save you and a future tenant money and reflects a more sustainable approach by avoiding materials being wasted.
7. Indemnity clause
A lease is a contract and if you are in breach of your obligations, the landlord’s main remedy is to sue you for damages. This is time-consuming and expensive, so instead the landlord will want you to give an indemnity. In effect, this means you have to pay for losses and expenses the landlord suffers as a result of your breach of contract, without the landlord having to prove them in court. If the landlord insists on an indemnity, you should at least require the landlord to do all it can to minimise losses and give you an opportunity to put any breach right before you have to pay out.
8. Service charge
Most tenants have to contribute to the cost of services the landlord provides, on top of paying rent. The extent of the services will depend on the property. They typically include things like maintenance of areas not included in the lease, as well as heating, lighting and cleaning. If you take a unit in a much larger development, the services may be more extensive and cover things like public space, shared access roads and car parking. Your solicitor should make sure there is a clear list of the services for which the landlord can charge and that any right to add extra ones is limited. It is also common to list things that must never be included in a service charge, like upgrades to the property that go beyond what is required to repair it. You should also ask for the right to challenge service charge items and inspect quotes and receipts.
9. Rent holidays
When the nation went into lockdown to stop the spread of Covid-19, many tenants were shocked to realise they still had to pay rent, even though it was illegal for them to trade from their premises. As a result, many tenants now want their leases to provide for some sort of rent holiday if the business is forced to close under government instructions due to a future pandemic or for some other reason beyond the landlord and tenant’s control. This is still new, so the terms actually offered by landlords depend on how keen they are to let a particular property and how much they value you as a potential tenant.
10. Access rights
Make sure the lease gives you any rights you need to go onto or use any areas that are not part of your premises – perhaps to put air conditioning or communication equipment on the roof or to use access routes and loading bays. At the same time, look out for any rights the landlord is reserving to come onto or encroach on the property let to you. Be particularly careful about rights to come in to inspect or carry out works and make sure that the lease says that any visits must be at reasonable times and on reasonable notice and that the landlord must minimise any disruption to your business.
How we can help
Lease negotiations can break down and become slow and expensive if either side is too rigid. A good solicitor will help you work out the key commercial issues quickly and concentrate on negotiating the best deal for you, so you can get on with running a successful business from your new premises.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.