Thinking of leasing your business premises to a new tenant? Commercial leases are usually much less standardised than residential leases and so there is more room for negotiation.
Commercial landlords have a variety of priorities when it comes to letting premises. Kate Westlake, a solicitor in our Real Estate team, picks out some top tips for ensuring your premises is let out to its best potential.
Quality of tenant
Whether a limited company or a private individual, doing some background checks makes all the difference should the tenant default on any payments due within the lease.
Asking for a rent deposit (usually up to the equivalent of three months’ worth of rent) is a good way of ensuring you have a ‘pot’ of money available should your tenant default on payments.
If your tenant is a company, check to see whether they own any substantial assets or, request that one of the directors or shareholders enters into the lease as a guarantor. It may also be wise to check Companies House to see the company’s previous accounts as you will want to make sure that you are in the best possible position to recover any monies due under the lease.
Security of tenure
A business tenant has a statutory right (under the Landlord and Tenant Act 1954) to renew its tenancy at the end of the term.
A landlord and tenant can, however, enter into an agreement to exclude the statutory provisions from the lease which means that when a lease term comes to an end, the tenant will not have the right of the statutory lease renewal.
Negotiations between the landlord and tenant will need to take place before the lease is entered into and necessary declarations and notices will need to be served on the tenant if the lease is to exclude the statutory provisions.
If the rights are included it can be difficult for the landlord to get the property back at the end of the lease term without going through a court process and demonstrating certain grounds are satisfied (i.e. that the landlord wants to develop or re-occupy the property themselves). Sometimes, compensation can be payable to the tenant.
An option for the tenant to renew the lease at the end of the term can, however, be a provision of the lease even if it is contracted out of the Landlord and Tenant Act.
It is likely most business tenants will prefer to have the statutory right and the exclusion of it can have an effect on the rent review (if applicable) and so advice should be sought from a surveyor when negotiating this point.
Repair
Many leases include provisions for the tenant to keep the property in a “good state of repair”. This essentially means putting the property into the same condition as it was at the grant of the lease.
To ensure the property is returned to this state, a schedule of condition is a good way of documenting the condition of the property at the grant of the lease and can avoid arguments later on regarding the condition of the property at the start of the lease. This should include photographs and a detailed description of the condition of the property and should be annexed to the lease.
Break clauses
A break clause can be included in a fixed-term lease allowing either the landlord or the tenant to end the lease before the expiry of the fixed term period. Of course, in some instances, landlords will want to ensure that the tenant is committed to the fixed term period. However, break clauses can be an attractive tool to secure tenants.
If including a break clause, the landlord should attach certain conditions to the tenant exercising the right to end the lease early (i.e. rent should be up to date and the premises returned to a satisfactory state) to it to ensure that the landlord does not suffer any financial implications as a result of the tenant exercising the break clause.
Rent review
Rent review clauses are common in commercial leases as the landlord can be flexible in the beginning to the amount of rent they charge (for example, if a tenant is a new business and in the early stages of their company, the landlord may accommodate this and offer a lower rent for the first year or so) – this again could be attractive to business tenants. After that initial period, the landlord can increase (or decrease) the rent in line with similar properties based on the open market values or as RPI increases or to a fixed amount as stipulated within the lease.
Use
A commercial lease will usually stipulate what use the property can be used for and, if the tenant wishes to change that use, consent from the landlord will need to be obtained. This prevents the tenant from carrying out business at the property which the landlord does not agree with (i.e. protects the value of the landlord’s property) and prevents competition with the landlord’s own businesses or that of neighbouring properties which the landlord lets.
The use of the property may also impact the rent review and so advice must be taken from a surveyor on whether the use of the property makes any financial impact.