How To Avoid Surprises From Your Landlord
Adam Youatt on common mistakes leasing premises – part 1
LEASING premises is one of the top three costs of any business. Commonly it is second only to salaries. It is also one of the longest financial commitments a business makes, requiring owners to predict how their businesses will look in five, 10 and 15 years, difficult for even the most established players.
Businesses could do well to pay more attention to the changing market to minimise the burden of these costs.
As a tenant you should consider the issues well before signing up. Costly mistakes arise because tenants don’t consider the implications of unquestioningly accepting the landlord’s traditional terms landlords.
I Length of lease (term): Gone are the days of landlords insisting on 20 to 25 years terms. The average length of a commercial property lease has been falling over the past decade.
Ten or 15 year terms are now the norm for office premises often giving the tenant the right to terminate the lease after five or 10 years.
For industrial premises short-term six year leases are widely available. Predicting your future premises requirements can be difficult so shorter terms are advantageous. A tenant also pays less Stamp Duty Land Tax on shorter term leases. If long term continuity and security are a concern, options to renew for further short terms can be considered without increasing tax liability.
I Conditions to terminating early (break clauses): It is important that you can exercise a right to terminate early to be certain of actually bringing the lease to an end.
Historically, rights to terminate early have been subject to strict compliance. Pre-conditions often trip up tenants on technicalities and leave them with expensive premises they no longer require. The starting position of any negotiations should be an unconditional right to terminate early, or, at most, that the annual rent is up to date; occupation given up; and no continuing sub-leases.
I Ability to pass on your liability (alienation): Even with shorter terms and rights to terminate early, a business can still find itself having leased space it no longer requires. In these circumstances easily off- setting or off-loading that liability, without onerous restrictions, is very important.
Landlords are keen to keep a tight control over the terms of any sale or under-letting of a tenant’s lease, but both are ways a tenant can either pass on or reduce the cost of leased premises. The often lengthy and cumbersomely phrased restrictions can seem irrelevant or legalistic when negotiating original terms of the lease but can have practical, and often costly, implications for a business years down the line. Any restrictions should be reasonable, seeking to balance the landlord’s desire to protect capital value interest in the property and the tenant’s need to manage its business costs.
I Certainty of leasing costs (outgoings and service charge): Rent is the most obvious leasing cost. A good surveyor can establish if this is being set fairly. But it is additional costs, particularly service charge and insurance rent that can be hidden or come as a surprise.
Pay attention to the costs that can be recovered by the landlord through the service charge and think about excluding costs which would be unfair, such as costs not recoverable from other occupiers because of commercial deals done with them or those for services you would not actually use. Service charge caps, or even inclusive rents, are becoming more common especially for the shor ter leases. Insurance costs should be fair and reasonable and should represent value for money.
I Potential changes to business requirements (alterations and change of use): You may need to change the premises to accommodate a new office or store layout. This will necessitate physical alterations which will commonly require the landlord’s consent.
Obtaining this consent may be time consuming and costly so should only be reasonably required where you plan to do something affecting the structural integrity or capital value of the premises. For minor non- structural internal changes there should be limited restrictions.
You may also want to use the premises for a different operational part of your business or sell your lease to a business which is in a different sector to your own. You should therefore ensure the permitted use under the lease is sufficient for your purposes, but also flexible enough to still be marketable.
Next month: Dealing with rent reviews, maintenance and risk.
Adam Youatt is a partner in the real estate department of law firm Gateley.
This article has been reproduced from the Contract Flooring Journal. You can find them at www.contractflooringjournal.co.uk.