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Commercial leases – a practical guide

Charles Hylton-Potts explains what to expect when taking a lease of commercial premises

Exciting times. You’re ready to start your business, by opening a shop or restaurant, or to take it to the next level, by letting an office or warehouse. Take stock – a commercial lease has wide-ranging implications and so represents a significant investment. As a commercial property solicitor, it is my job to advise you on these and tell you what is normal, and what is not.

Here are some of the things you should expect.

Heads of Terms

The process begins with agreeing “heads” setting out the key terms, so that the parties know they are on the same page before solicitors are instructed.  This is the time to negotiate commercial points such as:

  1. The rent, any rent-free period and/or rent review;
  2. How long the lease will be and whether you can break it early by giving notice;
  3. Whether you can “hold over” when the lease ends and request a new lease; and
  4. What security you will give to the landlord.

Security

Most common is a rent deposit – cash equal to a number of months’ rent – that you give to the landlord to hold whilst you are their tenant. A personal guarantee may be requested if the tenant is a company.

Service charge

For smaller buildings, the landlord may charge you a proportion of its expenses in maintaining the building on an ad hoc basis, plus a proportion of the buildings insurance premium. Where there are common areas and/or multiple tenants in the building or estate, the landlord will likely operate a formal, periodic service charge – here, each tenant pays on account towards the landlord’s costs of repairs and other services, such as cleaning, security and servicing any lift, and a balancing payment or credit is made after the year end. Ask for an annual cap to your liability, which will give comfort against large one-off costs.

Repair

Commercial leases rarely allow for “fair wear and tear”.  You normally have to keep the premises in good repair and condition and give them back in that state. If the premises have issues, ask to attach a “schedule of condition” to the lease, so you need not give them back in a better state than they are at the start. In any case, remedying “dilapidations” at the end of the lease can be expensive, so set funds aside during the lease to cover the costs.

Alterations

Typically, you can make non-structural alterations inside your premises with the landlord’s permission which cannot unreasonably be withheld, but the landlord has total discretion in allowing alterations to the structure, exterior or common areas. It is best to obtain permission to any changes you wish to make before you sign the lease.

Alienation

This basically means the ability to assign the lease or sublet. Usually you will want to be able to do both, to maximise your options in case you need to move out early. Landlord’s consent is usually required and conditions are likely to be imposed.

Permitted use

The lease will permit a specific use, e.g. retail or offices. It should be checked that the premises have planning permission or immunity for that use. You may need landlord’s consent and planning permission to do something different.

Taxes

  1. Stamp Duty Land Tax also applies to commercial leases. If you pay no premium, it is charged at 1% of the amount by which the rental value of the lease (over its whole term) exceeds £150,000.
  2. Business rates sting, more so if your premises are in an area where market rents are high.  Find out the figure for the premises and budget accordingly.
  3. Check with the landlord whether VAT is payable on the rents.

Forfeiture

Hopefully everything goes to plan, but if your business struggles and you fail to pay your rent, most leases allow the landlord to forfeit the lease after a period of 14 or 21 days. They do not need a court order; they can just change the locks. If, on the other hand, you find the cash to settle the arrears afterwards, you will need to go to court to get your lease back.

For more information, our commercial lease solicitors can be accessed in our Wimbledon and Epsom offices.

This article was written by Charles Hylton-Potts

Please note the contents contained in this article are for general guidance only. Legal advice should be sought before taking action in relation to specific matters.

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