As your business expands, you are likely to need more space to accommodate your staff and customers, but what issues should you think about when negotiating with a landlord?
Commercial Property Solicitor Kathryn Johns highlight seven points to consider for a commercial lease.
1 Rent payments
Does your landlord require monthly or quarterly payments? It is still very common for payments to be paid four times a year on 25 March (Lady Day), 24 June (Midsummer Day), 29 September (Michaelmas) and 25 December (Christmas), reflecting significant medieval religious festivals. This can adversely affect the cash flow of a business if there is no provision in the budget.
Is the property subject to VAT? The usual position is that VAT is not due on rent under a commercial lease, but a landlord can choose to apply VAT if they advise HMRC of their decision. This automatically adds twenty percent to the initial annual rent and some businesses may not be able to reclaim the VAT. The exact circumstances of how this might apply should be checked with your accountant.
3 Rent Review
A landlord may request a rent review during the term of the lease, to ensure that the annual rent reflects the local open market rent. Rent reviews are usually decided to be the higher of the current rent or the open market rent, making them generally upward only.
4 The Property
It is best to confirm with your landlord during initial negotiations the exact extent of the space to be let. If you take on the entirety of a building, you will likely be responsible for the whole property from the foundations to the roof. A lease of part of a building will still include service charge provisions, obliging you to contribute towards the repair of the common parts.
How long do you intend to stay in the property? A short-term lease may be acceptable if you are planning to expand rapidly, but a long-term commitment (perhaps ten years) means ensuring that the property meets your future needs as well as your current requirements with sufficient space to expand.
6 Security of Tenure (Right to renew)
Any commercial lease automatically benefits from the right to renew on similar terms on expiry, if certain criteria are met (such as occupation by the tenant). The parties can agree to exclude this right, perhaps if the landlord has long-term development plans for the building but it is best to take independent legal advice before giving this concession as a tenant.
A landlord may request security to ensure that their rent is paid and the tenant’s covenants are performed. While some landlords may ask for a personal guarantee, this is rarely the best option as an individual stands liable not only for the rent if the tenant cannot pay, but all repairing obligations and other covenants in the lease which can become a significant uncapped cost. A simpler and more practical option is for the tenant to offer a rent deposit, a fixed sum which can be forfeited if the business fails but no personal liability for an individual involved in the business.
This list is by no means exhaustive and should not be taken as legal advice with regard to any particular transaction or circumstances. It is advisable to work with a commercial property solicitor like Kathryn Johns who has a wealth of knowledge and experience in these matters.