Commercial Property Lease Expert

Length of lease

Be wary about signing up for more than three to five years. That's a very long time and business is changing fast. Whatever you do, never ever sign a long-term lease of 10 or even 20 years on premises, no matter what rates are on offer. Big businesses with proven business models and multiple outlets can do this, but small new businesses can't.

What can you use the premises for?

Make sure any lease you sign actually allows you to use the premises for the purpose of your business. Sounds stupid, but it's an important detail to ensure is in there. You may also look for some flexibility to be built in so that you can make changes to your business model down the line, without having to renegotiate your lease (for example you might start a restaurant and later add a take away section). One thing to be aware of is that no matter what your lease says, you must also have planning permission to run your type of business from that building. There are strict rules governing the kinds of businesses that can be run from different areas. Doesn't matter what the lease says — if the local council won't grant permission for a chip shop at your premises, it's not going to happen.

Costs

Of course you will have to pay rent. And it is normal practice for the tenant to pay utility bills and rates. You may also be asked to pay a service charge for ongoing services provided by the landlord, including covering the costs of their buildings insurance. It is also worth checking to see if your business will have to pay VAT on the rent. Even if your business is VAT registered, VAT payments on rent will have a cash flow implication.

Getting out early

Many leases contain something called a break clause, which gives you and the landlord the chance to end the lease early. This is normally a protective clause should your business not perform well and you need to close it down, especially a retail shop. For your own protection look to get a clause like this inserted, or there's a chance you may find yourself personally responsible for the lease when your business has ceased trading.

Passing the lease on

And the other thing to look out for is the right to pass the lease onto someone else. Be aware that sometimes commercial landlords will insert a guarantee clause, stating that if the new tenant doesn't pay the rent during the rest of the term of your lease, it is you who is responsible for it!

Repairs

If you break it, who fixes it? Some commercial leases come with full repair terms, where you are required to make any repairs needed to keep the premises in good condition while you are using them. Be very aware of this; unless the premises have been recently refurbished you may find your business becoming liable for making up the general disrepair of the premises a few years down the line, when it is hard to remember what damage was there and what was caused.

Experts say the Commercial Lease Code made recommendations that your obligation to repair should be limited according to the length of the lease, age of the premises and the state of repair of the premises at the start of the lease. Unfortunately, the recommendations of the code are not being followed by all commercial landlords. If your lease puts the responsibility for repairs in the hands of the landlord, reach written agreement with them about how to report faults and how long it will take for them to be fixed. No business wants to wait 10 days for a leaky customer toilet to be fixed.

The bad news first

Commercial Leases are designed to protect the Landlord's or Tenant's interests.

Solicitors (or property lawyers) have spent years creating these unwieldy, ugly documents simply to ensure that you cannot get out of your obligations.

So, let's deal with the bad news first — if you have signed a commercial lease, chances are, you are stuck with it in the legal sense (don't despair just yet, read the below first). It doesn't matter and is no excuse that you didn't seek small business advice or that the commercial property agent told you it was ok — you're in business now, with all the risks attached.

If you are a Landlord, then you might want to see our separate sheet "nailing tenants to the floor." This sheet is primarily for Tenants wishing to end or get out of their lease.

Now for the better news :-

Let's start with the obvious. Go over your lease and check that it's signed (believe it or not, it happens).

Next check for any break rights — you may have these if you negotiated it at the start but a large number of leases don't have them in. If you do have a break right it is VITAL that you comply with the instructions within the lease for ending it (e.g. if it says you must give at least 6 months notice in writing to a specific address, then this is exactly what you need to do — as any other form (even if they say it's ok) is not valid and you would end up with the lease.

Assignment and underletting

If the above two have not helped then we need to look at other ways of getting rid of the lease, so now check the lease to see if you can sub-let or assign the same. Nearly all leases have these provisions (it's normally only very short leases that don't) and it should say something along the lines of "not to assign part only of the lease, not to assign the whole of the lease without the consent of the Landlord, such consent not to be unreasonably withheld or delayed" (similar provisions often apply to sub-letting)^[1].

The problem with this is that you need someone interested in letting your property from you — and you will need a Solicitor or property lawyer to look over the lease to see what obligations will still exist. Speak to the local commercial property agents (some estate agents have a commercial arm). They will be able to advise you on the rent you are likely to obtain in the area and allow you to decide whether it's worth doing. A further concern is that many leases won't allow you to rent the Property at less than you are currently paying (or more in a lot of instances).

Surrendering the lease

A further alternative is to speak to the Landlord and ask to surrender the Lease. This was much easier to do when commercial properties were easy to let — but Landlord's are (understandably) reluctant to let you surrender the lease. That said, it is always worth asking the Landlord for a price they would take in which to give up the lease. A common figure used to be a year or two year's rent but in this climate, a surveyor may be required to determine the surrender value.

Company held leases

If your business is the owner of the lease — and your business is failing, is it worth letting the lease go with the business? That is, if your company is trading at a loss and you have a large lease, you may be able to leave all personal liability behind.

The downside of this is that in many commercial leases, they ask for a personal guarantor (e.g. an individual who will guarantee the re-payments of the rent).

Risking it

The final option is that you just walk away. If you have no money and are on your uppers then there is something to be said for handing the keys back to the Landlord and walking out. The flip side of this is that they would then have 6 years in which to come after you for the money — so even if you thought they was not going to chase you for the outstanding liability, you could find yourself being chased after you thought the debt had gone.

On a brighter note, many commercial landlords are not making individuals bankrupt as they have realised that it can cost around £3,000 just to make you bankrupt at which time, they still won't get their money.