Gavin Wall, a solicitor and licensed conveyancer, and director and the lead commercial property lawyer in Conveyancing Expert, helps you navigate business premises leasehold pitfalls when moving location.
Ending an old lease and/or taking on a new lease is fraught with perils for the unwary. Even experienced tenants can fall foul of unfair terms so the advice here may just help you avoid some of the traps when moving to a new site.
1. Know who’s side the agent is on
If you are negotiating a new lease, remember that the commercial agent is acting for the landlord - not you. Commercial agents still work on a commission basis though, and if you can present as a good covenant (a good tenant) then they are likely to work with you. Most agents will want two trade references and a bank reference so start organising these as soon as you start looking at business premises.
2. Get the HOTS
Obtain a set of sample heads of terms (HOTS) and write down what you would like in each section before you start negotiations. Knowing how much you can pay (including service charge, insurance rent, business rates and the actual rent) will help you negotiate your lease under the best circumstances and prevent you getting carried away in a the face to face meeting. Other things to consider: Use the Lease Code which though voluntary, is a great place to start and if you get a Code compliant lease then the terms are more likely to be fair. You can go to www.leasingbusinesspremises.co.uk to obtain a model set of Heads of Terms.
3. Get security of tenure
All business leases are protected by the Landlord and Tenant Act (1954). In plain terms this means that once the lease ends, you can automatically renew the lease. That said, you will often be offered a lease ‘without security of tenure’. This means that you would be signing away your rights to renew the lease at the end of the term. For all tenants, we would recommend that you negotiate to keep the lease ‘inside’ the provisions of the Landlord and Tenant Act.
4. Lease term lowdown
Leases of seven years or over have to be registered at the Land Registry. For this reason, leases under this term have become commonplace. As the solicitors will deal with the registration at nominal cost, you should not factor this in when negotiating the term of a lease. Instead, look to your business plan - see what length of lease would suit you. A new business may wish to limit liability to just a few years whereas a more established company may wish for 20 years or more. Don’t forget however to check on the HMRC website to calculate whether Stamp Duty Land Tax (SDLT) is payable as it is often payable on commercial leases.
5. If you break it, who fixes it?
Some commercial leases come with full repairing 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 ten days for a leaky customer toilet to be fixed.
6. Limit your responsibility
When negotiating a new lease, unless the premises are brand new or freshly renovated, you would be wise to ask for a schedule of condition. This is a bundle of photographs that you often prepare yourself and it will limit the repairs you have to do (eg. if the roof is becoming old, you may limit your repairs - by reference to photographs - to not making it in a better condition than at the start of the lease).
7. Beware excessive charges
Don’t forget to get copies of insurance schedules and service charge accounts. Many a deal has been scuppered by excessive charges. Properties with a claims history can leave the tenant with an excessive bill (e.g. after the riots in London, many insurance polices quadrupled in price).
8. At lease end
Do you need to hand over the keys? If your lease is ‘included’ in the Landlord and Tenants Act 1954 then the answer is no. Business tenancies are automatically included so if you are not sure, speak to your solicitor as you may not have to leave.
9. Forfeiture
Sometimes things go wrong. When they do, a Landlord is able to forfeit the lease. They can often forfeit for: non-payment of rent; not complying with covenants of the lease (eg. decoration); if you go insolvent. If you can remedy the problem quickly, it can usually prevent the lease being forfeited - but do take advice.
10. Do end of term decoration
If you have a repairing lease and it is coming to an end, it is often good business to repair and decorate the property at the end of the term. This is best done with the agreement of the landlord who may agree what items need repairing before a schedule of dilapidations is prepared (see next top tip). The reason you would do this rather than wait for a schedule of dilapidations is because under most leases, the landlord can prepare the schedule of dilapidations several months after you have left the property. At that time, you would have no control over the costs
11. Dilapidations to deal with
If you have a repairing and maintaining lease then dilapidations will need dealing with. At the end of a business tenancy most leases allow the landlord to send a surveyor to the property (at the tenant’s cost) to check that it is in good condition. This process is known as ‘dilapidations’. The surveyor will prepare a schedule of dilapidations which will list any repairs, reinstatements or decoration that needs doing. The surveyor who prepares the schedule of condition will also cost out the repairs and it is this bill that is coming to you.
Although you can dispute the amount of dilapidations, it is best to avoid them in the first place (see previous top tip).