Q. We are starting to expand our business so we need to take on new premises. Having seen other business tenants run into difficulties in recent years we would like some tips on how best to protect ourselves when negotiating a new lease.
Caroline Williams, a Solicitor in our Commercial Property Department.
The first thing to remember is that the commercial property arena is largely still a tenant’s market. Many landlords are finding themselves with empty properties as a result of previous tenants running into difficulties or prospective tenants choosing not to relocate due to uncertainty about the future. With that in mind, it is worth being bold in your negotiations and seeking legal advice before you enter into a lease to ensure the terms you are signing up to suit your needs and you are protected for the future as far as possible. Some pointers to consider are:
Length of lease term. Historically, commercial tenants often took 15-20 year leases which gave the landlord certainty of income and allowed the tenant to build goodwill at the property over a long period. Nowadays no business can be certain it will still be trading in 15 or 20 years time so short leases (3-5 years) are commonplace, particularly for newly expanding or small businesses. Tenants can no longer assume that they will be able to assign the lease to a new tenant during the term so a shorter term can alleviate concerns about the future.
Statutory Protection – the Landlord and Tenant Act 1954 (‘the Act’)
Unless the lease specifically excludes it, you will have the automatic protection of the Act which gives you the right to a new tenancy on broadly the same terms at the end of the lease term. The landlord can only object to a new lease on certain limited grounds. It is in the tenant’s best interest in every lease negotiation to ensure that the Act is not excluded but it will be particularly important for tenants choosing to take short leases, and even more so if they are also intending to carry out alterations or fit out works at the property. Legal advice should be sought to ensure that the draft lease includes this important statutory protection.
Try to include a break clause
The most flexible type of break clause would be a rolling break allowing the tenant to terminate the lease at any time during the term. However, many landlords will only agree to a break clause which can be exercised on a specified day or days (for example on the third and sixth anniversary of the date of the lease). A break clause will be triggered by the tenant giving notice, the timing and format of which must be absolutely correct. A mistake in the break notice can mean the tenant loses the right to exercise the break which can be costly so it is important to take legal advice before serving the notice. Furthermore, an unscrupulous landlord may seek to make the exercise of a break clause conditional. Such conditions may, on the face of it, seem reasonable but in reality can make it almost impossible for the tenant to actually exercise the break, making it worthless. It is worth seeking the advice of a solicitor on the wording of a break clause to ensure that it gives you adequate protection.
Rent payment dates
Most leases require the rent to be paid quarterly. To assist with cash flow try to agree with the landlord that the rent can be paid monthly.
A landlord will invariably insist on making the tenant fully responsible for all repairs and maintenance at the property, particularly if the lease is for the whole (as opposed to a part) of the property. This creates an obligation to put and keep the property in a good or substantial state of repair and condition which can lead to a costly repair bill for the tenant at the end of the term of the lease. A reasonable compromise would be to suggest that the tenant’s obligations are limited by reference to a schedule of condition or schedule of photographs which will be prepared at the start of the lease term and attached to the lease. This, coupled with the correct wording in the body of the lease, ensures the tenant is not expected to put the property in any better condition than it is in at the start of the lease so it will only be responsible for the damage, wear and tear it causes.