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How to Negotiate a Commercial Lease?

How to Negotiate a Commercial Lease?

speaker_notes What you can best hope

This guide is based on a Tenant's perspective as Landlords have often let out properties before and have an idea of what they require. In a perfect world, a Tenant would have a lease with low rent, a long term for security but the right to exit without penalty at any time.

But as it isn't a perfect world, let's see what you can best hope to achieve:

  • expand_more The Rent

    The rent is the main outlay of the lease but not all and sometimes a lease with a lower rent may not be as effective as one with a larger rent but more favorable repairing or insuring provisions. A good rule of thumb is to ask local agents and compare rent on a like for like basis. Be bold, go and ask the next shop along what they pay and don’t be afraid of knocking the rent down — to Landlords, an empty shop is a burden and at the time of writing this, it is still very much a Tenant’s market.

  • expand_more Repairing Obligations
    1. A lease of part (e.g. one of a row, a shopping centre or the downstairs of a larger building) usually has service charge provisions — particularly if there are common areas which need lighting/cleaning and maintaining.

    2. Leases of the whole often have full repairing obligations.

    3. When there is service charge, this does not need to be accepted — Landlords can often make money on service charge so do review the figures carefully — for example, you need to see whether it is based on sq foot or whether it is ad-hoc as the repairs occur — you could even suggest a cap on the service charge with the Landlord being responsible for items over that level. You may even be able to negotiate that you maintain the interior but do not contribute to the foundations or roof — this is very much an open negotiation.

    4. When there are repairing and maintaining obligations, a good rule of thumb is to ensure that you are protected by a photographic schedule — this will allow you to limit your exposure to just keeping the property in the same condition as it was (is) at the start of the lease.

  • expand_more Insurance
    1. Some leases require you to insure the property and send the Landlord a copy of the policy. This is slightly surprising in that if you owned a property — would you trust someone else to insure it?

    2. Most leases of part will have an element of the insurance payable for the entire block but surprisingly, you can still negotiate as the larger commercial Landlords may have arranged a commission back — e.g. you pay £1,300 a year for insurance and the Landlord get's £500 back from the insurance company. You can negotiate this out.

    3. In any event, always make sure you obtain a copy of the insurance policy and check it carefully — there may be risks that are not covered (e.g. how many shops in London had cover for riots?)

  • expand_more Term
    1. What term do you want and why? A lease must be registered at the Land Registry once it is 7 years or more. This gives you some protection for your Lease but there are small cost implications.

    2. A lease under 7 years is normally not registered (it can be registered against the Landlord's title if there are rights granted — e.g. you may want to register the lease if you have a right to cross a back passage or store your bins etc. This is so that if the Landlord sells on his interest, you will still have the benefit of these rights (this is quite a simplistic view).

    3. Don't forget though, whatever term you choose, you will be bound to comply with the lease for this term (subject to any break rights of course).

  • expand_more Stamp Duty

    Yes, Stamp Duty Land Tax ("SDLT") can and is payable on commercial leases. Even relatively small leases can attract SDLT. E.g. a lease for 10 years at £15,000 per annum does not attract SDLT — indeed, even at 18,000 a year for 10 years does not but….take that to £25,000 per annum and the SDLT would be £579.00. As the SDLT rates do change from time to time, please check with HMRC who have calculators online to assist.

  • expand_more Break rights
    1. Despite the recession seeming to be over, a break right is good practice and it just gives the Tenant the chance to exit the lease before it bankrupts them. We would always strongly recommend that the Break Right is only in favor of the Tenant. Mutual Break Rights should be avoided — particularly when your business is dependent on location (e.g. a sandwich or coffee shop would be devastated by a change of address – whereby an accountant’s office may not).

    2. As a rule of thumb, the Break Right should tie in with how much you can afford to risk so if you are prepared to lose £30,000 and your rent is £10,000 a year, then you may set a Break Date at year 3.

  • expand_more Landlord and Tenant Act

    The gist of the Landlord and Tenant Act is that in a business lease, the Tenant should have security of tenure – i.e. when the lease comes to an end, you can renew on the same terms. Many Landlords do not want to grant you this right as it allows them some more leverage when negotiating rent reviews and terms so they "exclude" the Landlord and Tenant Act provisions. Always try to get the Lease "included" within the Landlord and Tenant Act.

  • expand_more Alienation
    1. No, Alienation is not an invasion by little green men – this is the term used to determine whether you can assign or underlet (or both) the lease. It is common to see the term that assignment of part is not allowed and assignment of the whole is allowed with consent from the Landlord ‐ such consent not to be unreasonably withheld or delayed. The Heads of Terms (HOT's) often do not cover alienation so this may very well be down to your solicitor to negotiate.

    2. One of the hurdles we have been finding is a restriction on the use of the premises. This means for example that a lease which restricts the use to that of a tattoo parlor may then find that even if the Landlord allows you to assign the lease – if you can only pass it on to another tattoo artist, then your chances of doing this are minimal. Further, it is normal for an assignment to include an Authorised Guarantee Agreement (AGA) which means that although someone else has taken on the lease, you will still be responsible if they default.

  • expand_more Rent Review

    You may not get to discuss rent review with the agent but if it comes up, it may be worth trying to negotiate an open rent review that can go down as well as up. Most Landlords will be pushing for an upward only rent review but we are of the mind that if the market can increase, so can it decrease and the Tenant should have the option of applying to lower the rent if the market has constricted. That said, many Landlords will have lenders to satisfy and they require upward only rent reviews so you may find you have little to negotiate with. At the very least though, you may be able to gain a bit more time between rent reviews so instead of 3 years between reviews, you may manage to get it to 5 years.

live_help What to do next?

Ok, so you've found your perfect location, spoken to the agent and had your viewing and using the points above, you have agreed on Heads of Terms (HOT's). Now it's time to employ a Solicitor.

perm_phone_msg Call Lease Expert

A good commercial property lawyer (commercial property solicitors often call themselves real estate lawyers even though this is an Americanism) will usually make quite a difference when negotiating a lease on your behalf. Good HOT's help — but it is down to the solicitor to ensure that a wily Landlord has not slipped in a smattering of onerous terms.

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