Juliet Farrington-Breeze, a solicitor in our commercial property department, outlines the process of renting commercial property.
Renting commercial property
When you are seeking business premises, it is an exciting but often an overwhelming time. You need to find the right balance between meeting your business needs, finding your preferred location and sticking within your budget. If you are looking for commercial property for rent, there are many avenues where you can begin your search, such as online or through a commercial agent.
Landlords will often have commercial agents acting on their behalf to market their properties, and to deal with the negotiation of the terms under which you will rent the premises. Agents will draw up a document known as the 'Heads of Terms', which will set out the agreements that have been made between the parties.
Although Heads of Terms are not legally binding, they can be difficult to alter once they have been agreed. You should therefore ensure that you fully understand the content before confirming that they are acceptable. If you would like advice on any information contained within Heads of Terms, don’t hesitate to get in touch. I am happy to have an obligation free chat and help decode the legal jargon for you!
Taking a commercial lease – Heads of Terms
So, you've found the premises which you want; great news!
Now you need to consider the terms that will make up the landlord and tenant lease. In brief, the main agreements to be made are as follows:
Term of the lease
Consider how long you are likely to want to stay (and pay!) for the premises. Whilst a long lease may seem advantageous, if you are starting a new business, you may prefer a shorter lease to give yourself flexibility. If you are taking a long lease, you may be able to negotiate a break clause and include alienation provisions (referred to below) for comfort.
A break clause sets out the circumstances in which the tenants and/or the landlords can terminate the lease early.
The break commonly occurs on a particular date and can be subject to certain conditions, such as providing notice and the rent being paid up to date. It is more preferential for tenants if the lease does not include a landlord break clause, as they can then be certain that they can stay in the premises for the entire term.
If you can negotiate the inclusion of a tenant break clause, this would give yourself assurance that, should your circumstances change, you have the ability to terminate the lease early and no longer be responsible for the property.
Rent and Rent Review
Rent will be one of the most important terms you will need to agree with the landlord. It may be beneficial for you to look at similar premises that are on the market, to see what they have been rented for. Rent for commercial property is often paid in advance in four quarterly payments and therefore you will need to consider cash flow. Some landlords are content to receive monthly payments - so do discuss this with them.
If you are carrying out works to the premises, you may be able to negotiate a rent-free period to prevent yourself being stung by both paying for the works and paying rent for the premises at the same time.
Remember to take into account that your rent payments throughout the term of the lease could change if there is a rent review. A rent review, as the name suggests, is an alteration of the rent payable. It is usual during mid to long-term leases that this will occur, and possibly on multiple occasions.
The fewer rent reviews there are, the more advantageous it is for tenants, as reviews are usually drafted as 'upward only'. This means that the rent which is payable will not decrease.
This refers to the tenant's ability to transfer the lease to someone else throughout the term. This gives flexibility to tenants so that should they no longer wish to rent the property (and they can’t break the lease), they may be able to assign the lease to someone else.
There are usually restrictions placed on when tenants are able to do this, together with conditions that landlords can impose in exchange for their consent. An example of a condition that the landlord may impose, is that the tenant may be required to enter into an authorised guarantee agreement. This is where the tenant acts as a guarantor to the person whom they are transferring the lease to.
Security of Tenure
Leases for business purposes attract 'Security of Tenure' under the Landlord and Tenant Act 1954 (‘the Act’). It is essential you understand the impact of this and are aware of the consequences of the lease being included within the Act or 'contracted out', before you agree the Heads of Terms.
If the lease in contracted out of the Act, you will not have an automatic right to a new lease at the end of the term. The default position is that you will need to vacate the premises or start the negotiation process again with the landlord.
If the Act is included within the lease, you have an automatic right to a new lease at the end of the term. In order to exercise this right, you will need to serve notice on the landlord. This notice is subject to strict time constraints, so do take legal advice in plenty of time before the end of the term. The landlord, in certain circumstances, can defeat your notice, for instance if the landlord wants the premises back for his/her own use or you have breached the terms of the lease.
Commercial leases usually contain limitations on what type of activity tenants may use the premises for, such as retail use or as a warehouse. There are unusual and very specific restrictions that impact some properties; your solicitor will ensure that if there are restrictions, they will not impact your desired use.
You may need to change the designated use of the property, which can require planning permission. It is best to discover this at the outset, so that there are no unnecessary delays during the transaction.
Unlike residential tenancies, the standard position if you are renting the whole of a commercial property is that you will be responsible for repairing the whole of the premises, including the structure. It is therefore really important that you are happy with the state that the premises are in, before you enter into the lease.
As part of the negotiation process, you could try to negotiate that your repairing liability is limited by a Schedule of Condition. A Schedule of Condition is made up of pictures and descriptions of the premises that reflect the state the premises are in. The inclusion of this would mean that you wouldn’t need to repair the premises to any better state than the state they were in at the start of the lease.
The lease - introducing commercial property solicitors
You’ve found your premises, you’ve agreed the Head of Terms… what’s next?
Now it’s time to instruct a solicitor to act on your behalf and deal with the formalities of putting a lease in place.
The process begins with the landlord's solicitor drafting the first version of the lease before sending it to the tenant’s solicitor, together with title documentation and their client’s responses to enquiries. The tenant’s solicitor will review these and raise more enquiries if necessary
As the landlord's solicitors draft the first version of the lease, naturally, the draft is more landlord friendly. It is therefore part of your commercial lawyer’s role to level the playing field and amend the lease. This is the bulk of your solicitor’s work and it can make substantial differences to your obligations under the lease.
Whilst this is ongoing, your solicitor will deal with submitting searches on the property on your behalf, if you wish them to be carried out.
The usual searches are as follows:
- Local authority search
- Chancel Search
- Water and Drainage search
- Environmental search
It’s your choice whether you have searches carried out or not. However, because the repairing liability is usually extensive for tenants, it is advisable (especially if a long lease is proposed) that you find out as much about the premises as you can, just as if you were purchasing the property.
Your solicitor will deal with any supporting documentation required, such a Rent Deposit Deed if you are providing a rent deposit and licences if you are wishing to carry out any alterations to the property.
Once the landlord and tenant lease agreement and any other documentation have been agreed, your solicitor will provide you with a report on the documents setting out your obligations under the lease and highlighting any onerous conditions. As some leases can be well over 50 pages long, this is an invaluable report to refer to.
The respective solicitors will then formally complete the lease. Your solicitor will, if necessary, apply to the Land Registry to register the lease against the landlord's title and deal with other post completion formalities.
What costs will be due?
The usual upfront costs that are due on completion of a lease are:
- A proportion of rent
- A proportion of service charge and insurance (if applicable)
- Rent Deposit if you have agreed to pay one
- Stamp Duty Land Tax (‘SDLT’). Whether SDLT is due will depend on the length of the lease you are taking together with the amount of rent that you are paying. I will be able to advise at the outset on whether you will incur an SDLT liability
- Your legal fees
- Landlord’s legal costs (only if you have agreed to pay them. You are not obliged to!)