RSS feedsProspective business tenants need to wise up when looking for office space. In a booming property market a commercial landlord can dictate terms but in the current uncertain climate there is opportunity for business tenants to redress the balance.
Leases can give rise to liabilities in addition to the payment of rent. Before committing to any deal seek advice from a surveyor or solicitor specialising in commercial property to maximise your chances of securing the most advantageous deal. The cost involved is usually outweighed by the benefits gained.
Decide what you want. Consider location and requirements such as air conditioning or parking and what fit out is necessary to make the premises usable?
Before negotiating, arm yourself with information on rents and incentives. An experienced surveyor will know what the landlord will concede. Incentives can include a rent -free period or capital contribution, sometimes payable to cover fit out costs. The key is to maximise incentives to your advantage as landlords will be keen to strike a deal.
Make sure any service charge for the upkeep of the building and communal areas is capped to avoid unforeseen extra costs. This should be agreed at the Heads of Terms stage along with what is included in the charge and your liability.
It is also worth asking for clarification on buildings insurance costs and whether VAT is charged on rent. This is often overlooked by tenants but can be substantial and affect decisions. A stamp duty land tax liability might be payable. The amount is calculated by the length of lease and rent.
There are other statutory requirements where the likelihood of non-compliance is lower, but the potential liability can be immense, such as whether the premises are suitable for use by disabled people. Contamination is another major concern, because the current occupier can be liable as well as those who caused the pollution. To manage these risks have the appropriate audits or surveys carried out.
Flexible terms
When the heads of terms have been agreed, these will be incorporated into the lease that will be the governing document between the parties. You are contractually tied into the lease for its full duration, so it would be prudent to gain maximum flexibility. Seek full rights to transfer or sublet the whole or part without unduly onerous conditions. Consider asking for a break option without conditions.
Without these options you would be at the landlord’s mercy when forced to negotiate the terms of a surrender, which may involve the payment of a capital sum.
Finally, agree your repairing obligation by reference to a photographic schedule of condition. This is the best means of recording the condition of the premises when you take up occupation. When your lease ends, you will not be required to put the premises back into any better state of repair and condition than evidenced by the schedule.
Some form of security is usually required from new tenants. A monetary
deposit is better than a company or personal guarantee, because the extent of
the liability of a guarantor is the same as the tenant. A rent deposit can be
subject to the landlord repaying it when a net profits test is satisfied.
In summary you should:
- Appoint a professional adviser to assist in negotiating the key terms of the letting.
- Seek a rent free period, capital contribution or some other incentive.
- Ascertain buildings insurance, VAT and stamp duty land tax liabilities.
- Consider appointing a surveyor to carry out all appropriate surveys.
- Seek an option to break and full rights to assign and sublet, without onerous restriction.
- Resist giving guarantees albeit that rent deposits are fairly standard.
Lease glossary
Alienation: the process of transferring a lease or creating sub-lettings.The more alienable your lease is, the more freely you can deal with it.
Break Option: a date (or dates) on which the lease may be ended early.
Demised Premises: the part of the property exclusively for your use. With this comes the liability to repair and maintain everything demised to you.
Schedule of Condition: attached to the lease, this is likely to consist of photographs of the demised premises. The tenant is not obliged to maintain the demised premises in any greater condition than they were to start with.
SDLT: Stamp duty land tax, payable on lease transactions over a certain value.
Security of Tenure: (1954 Act Rights), the statutory right to a renewal of your lease. This right can be excluded, as is often the case with shorter lettings.
Service Charge: a periodic payment to cover maintaining the building and communal areas, and providing services such as security and cleaning.
Use Class: a system of groups of types of usage authorised by planning permission. Notable examples include B1 (offices) and A1 (shops).
Terence Ritchie is a head of commercial property at SA Law
