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?

Sophie Darwish in our Commercial Property team at Phillips highlights seven points to consider for a commercial lease.

1. Rent Payments

Rent payments are typically made in equal quarterly or monthly instalments. Although quarterly payments are more common, paying a quarter of the annual rent at once could adversely affect the cash flow of your business. It may be beneficial to negotiate with the landlord and request that rent payments are made on a monthly basis instead. Provided that the landlord does not rely on the rent for quarterly outgoings, this should not be a controversial point to negotiate.

2. VAT

If the landlord has opted to tax the property, VAT will be payable on the rent. At its current rate, VAT would increase the rent payments by 20%. VAT will also increase the amount of stamp duty land tax that must be paid on completion of the lease. You should check with your accountant whether the VAT can be reclaimed. You should also include VAT when assessing if the business can meet the payments due under the lease.

3. Rent Review

If the landlord requests a periodic rent review in the lease, the rent payments are likely to increase during the term. The rent review will typically be linked to either the open market, a form of index, the tenant’s turnover or, alternatively, the rent review could be based on fixed increases. Generally, a landlord will want the rent review to be upwards only. As a tenant, it is preferable for a rent review to occur less frequently to ensure that the rent stays at a lower rate for longer.

If the landlord insists on a rent review and your business has been negatively affected by, for example, Covid-19, a turnover based rent review is likely to be the most attractive option. Turnover rent is becoming increasingly popular whereby the rent due is based on the tenant’s turnover during the term of the lease. While the landlord may be hesitant about the potential for lower payments, there is also the potential of higher payments if your business is doing well, and payments could be subject to a minimum.

4. The Property

The type of property will affect the tenant’s responsibility for repairs. If your property occupies the whole of a building, it is likely that your business will be responsible for carrying out and bearing the cost of repairs made to the entire building, including its structure. If your property is part of a larger building or an estate, your business is likely to be responsible for the internal repair only. In the latter case, the landlord should retain responsibility for carrying out repairs to the structure and the common parts and will, in most cases, charge your business for a proportion of this via a service charge.

Structural repairs carry more responsibility. However, if your property is internal only and significant works are carried out to the building or the estate, the service charge payments could increase. You should try and negotiate with the landlord for a service charge cap to avoid this.

5. Term

If your business is stable with a clear direction, and if the location is important to you, or if you are planning to make major alterations to the property, a longer lease term will give you more security. If future trading conditions are uncertain, you should negotiate with the landlord to include a break clause in the lease, A break clause will allow either the tenant, the landlord, or both, to end the lease on specific dates during the term.

If the landlord is not prepared to agree to a break clause, a short-term lease may be preferable especially if your business is likely to change in upcoming years. If you would like to remain in the property for a long time but are wary of the long-term commitment, an option to renew may be worth considering in the lease to give you that reassurance. Alternatively, you could negotiate with the landlord to include security of tenure.

6. Security of Tenure (Right to Renew)

Unless the lease expressly excludes sections 24 to 28 of the Landlord and Tenant Act (1954), as the tenant you will have security of tenure. If you have security of tenure and the landlord cannot provide a ground for opposing, you cannot be forced to vacate the property at the end of the term. You will also have a right to a renewal lease on similar terms.

The landlord will likely want to exclude a tenant’s right to retain control over the property so a tenant should expect this to be an area of negotiation. Excluding security of tenure is not preferable to a tenant, especially if you would like to stay in the property beyond the expiry of the lease or if you would like the option to renew the lease. By excluding security of tenure, you are essentially giving up rights. It is best to take independent legal advice before excluding security of tenure.

7. Security

Your landlord may request security for the rent payments and the covenants in the lease. If you agree to be a personal guarantor and your business defaults on their obligations in the lease, you will be personally liable. The landlord would be able to recover rent monies from you as the guarantor and insist that you fulfil the obligations in the lease. These payments can become a significant uncapped cost for you to pay personally.

An alternative option is to provide a rent deposit of a fixed sum, usually equalling between 6 and 12 months’ gross rent. The rent deposit can then be forfeited for any default of the tenant’s obligations. An advantage of this is that the liabilities are capped by the amount of the deposit, however you will need to ensure that your business can afford this significant cost upfront. If you feel that a default is unlikely and are resistant to paying the upfront cost of a rent deposit, a personal guarantee may be more suitable.

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.

If you would like advice on negotiating a commercial lease, please contact our commercial property team by calling 01256 460830 or by emailing [email protected]

Alternatively, click here to go to our contact page.

Disclaimer

This article is current at the date of publication and is for reference purposes only. It does not constitute legal advice and should not be relied on as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.