By Adam Bernstein
Unless you are lucky enough to own the premises your practice occupies you will have had to negotiate a lease with a landlord. Riddled with clauses and terms that confuse, tenants need to take care over what they sign.
There are more statutory regulations in place that protect residential tenants than commercial tenants, so it is important that a commercial tenant is fully aware of its lease obligations. More often than not there are differing concerns depending upon the individual property that is to be let or indeed arising out of a tenant’s particular use.
Tenants that ignore the possible eventualities before entering into a commercial tenancy could find themselves making an expensive mistake.
Whenever a commercial building is going to be occupied for at least six months for business purposes, a lease must be put in place. It should go without saying that as a tenant, you will want to get a good deal financially when negotiating, particularly in the current difficult trading times, where high rents are forcing many businesses off the high street.
No doubt you will also be looking for a good deal in terms of the property on offer. Does it, for example, have air-conditioning, car parking and secure entry and exit points? And what is included in the service charge? All these are factors a tenant will need to take into account as well as the rental cost.
When negotiating a lease
Partner and head of commercial property at Stephensons Solicitors David Baybut sees leases that can run to 60 or more pages. They tend to include a raft of standard details, including the rent to be paid, space occupied, how long the lease is to last and the tenant’s responsibilities and rights as well as the landlord’s.
“Leases can be complex and can include ‘mini agreements’ – additional clauses – that could have a considerable impact,” says Mr Baybut. It’s for this reason that he says seeking good advice is critical as “advisors negotiate with the agent or property owner on your behalf to secure the best possible outcome for you.”
What to look out for
The first element to be aware of is service charges. These are a major expense so make sure you have a clear understanding of what is included so that no nasty surprises arise later on.
Mr Baybut says service charges cause problems when tenants have a different understanding of what is covered under the charge, compared to what the landlord is prepared to offer.
“Typically these charges include repairs and maintenance of the building and communal areas, heating and lighting and cleaning. It is essential to ensure that what is covered under this charge is fair while also looking at how the cost is calculated.”
He advises ensuring that the service charge is capped, “particularly when the lease is only short term and the building may be in need of imminent substantial repair.”
There is a Code of Conduct for service charges that may give the tenant more rights than those expressed in the lease.
Next comes the cost of insurance for the building. Here Mr Baybut says to find out who pays the insurance before committing to the lease.
“Don’t assume the landlord has provided insurance. And if they have, check it covers everything it is required to.”
Then there is the question of repairs that can also be a considerable additional cost.
“It’s a wise tenant that checks who is responsible for the cost of repairs, especially if the building is old and in obvious need of updating.”
Mr Baybut recommends establishing from the landlord what state the building must be in at the end of the lease so that money can be put aside for this in good time if required.
“Most landlords will ask that their tenant keep their premises in full repair. This means that if at the outset the premises are in disrepair, through no fault of the tenant, it is still the tenant’s responsibility to make the premises good. The repairing obligation should ideally be limited, so that the tenant need not return the property at the end of the term in any better condition than it was in at the outset.”
A properly drawn schedule of condition not only showing but describing areas and condition of the building is essential.
When negotiating rental terms, Mr Baybut says to be aware of the commencing rent (and rent free periods if you can negotiate them too). He often sees landlords wishing to increase the rent on a premises at regular intervals, either annually in line with inflation, or periodically in line with increases in rents in the market place; it is not unusual to see a lease rent increase every three or five years.
“When rents are reviewed there are quite complex contractual provisions invoked, requiring experts to try and assess market rents, usual based on assumptions and disregards relating to the property. Some of these assumptions could artificially increase the rent beyond what you expect. It is important that you understand the mechanism for increasing rents and that you are comfortable that [what has been proposed] is fair.”
Traps that (potential) leaseholders can fall in to
With contracts invariably set up to benefit the landlord, Mr Baybut says it is advisable to avoid signing a lease which is longer than three to five years.
“Some leases can be as long as between 10 to 20 years but that could involve too much risk.”
Leaseholders should be careful not to commit themselves to a long term lease that does not contain an option to break it . Break clauses are important as they allow both the tenant and landlord to end the lease before the full term and can protect the business owner if the business gets into difficulty. For this reason, Baybut says it’s a good idea to have a break clause included in the lease as “it will save a tenant from being personally liable for the rest of the lease costs, especially where a business fails. If the break clause is timed to coincide with a rent review it could give the tenant an option to vacate the premises if the landlord makes unreasonable increases to the rent.”
Another clause worth including is one that allows the option of subletting. However, if the sublet tenant does not cover the agreed rental, all responsibility for the property still lies with the original tenant.
For their part, landlords can issue schedules of dilapidation.
“These focus on the repairs needed to reinstate the property and correct any damage done throughout the course of the tenancy. They will directly correlate with the obligations outlined in the lease and include a breakdown of all the repairs needed and a cost is associated with each repair,” says Mr Baybut.
The most contentious time for schedules to be issued is at the end of a tenancy when the tenant has vacated the building. Mr Baybut says this id because the landlord will use its own surveyor to estimate the costs and problems may arise “when tenants realise that they could have completed the retrospective repairs themselves at a much more reasonable cost.” Once the tenant’s agreement has ended they are not able to access the building to carry out repairs.
Tenants can protect themselves by carrying out repairs during the course of the lease on an ongoing basis rather than leaving it all to the end of the tenancy. As Mr Baybut notes, “disputes concerning dilapidations are complex and many factors need to be considered in challenging a schedule.”
Landlord and Tenant Act 1954
Lastly, tenants need also to be aware of the effect of their landlord wanting a lease to be excluded from the Landlord and Tenant Act 1954.
“From the tenant’s perspective, if they are looking to have the automatic option of being able to remain in the property on expiry of the lease, negotiations will need to focus on the lease being protected under the Landlord and Tenant Act 1954,” explains Mr Baybut. He says tenants need what is known as Security of Tenure to be included in the lease as “this grants them a right to remain in occupation even though their lease has come to an end.”
However, some landlords may want automatic possession of the commercial property, without fear of tenants claiming extended possession and occupation. If a landlord knows at the outset that they may want to occupy, redevelop or change the use of the premises in the future – acts that they cannot do with a tenant in possession – then they will want to see that there is no Security of Tenure granted to its tenant, and that the protection of the Landlord & Tenant Act 1954 is excluded.
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