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Commercial Property – Tips for First Time Tenants

Raymond James

Taking on commercial premises for a start-up or expanding business can be an exciting part of a new business project, but there can be some strange terms used in the process that await the inexperienced. Here are some of the most common commercial property tips, and an explanation as to what they actually mean.

AGA –

No, not some sort of kitchen appliance, but rather an abbreviation for Authorised Guarantee Agreement. When you take a new lease, you should expect the landlord to include an obligation on you to guarantee that any later tenant will also comply with the lease terms that you are now agreeing. For example, if the next tenant fails to pay the rent or comply with some other obligation in the lease, the landlord can ask you to fill the gap, even though you might have disposed of the premises some years earlier.

Excluded Lease –

You may hear the landlord tell you the lease being offered will be an ‘Excluded Lease’ for the purposes of the Landlord and Tenant Act 1954 or describe the lease as ‘non renewable’ or even ‘54 Act excluded’. This means that at the end of your lease term, so after two, five or 10 years, or whatever term you agree at the outset, you will be expected to vacate the premises and you will not have the statutory right to ask the landlord for a new lease. You can ask the landlord to agree a renewable or included lease where you would then have the right to renew at the end of the lease term.

Dilapidations –

essentially repair works. Typically a landlord will expect the premises to be put back in a good state of repair and condition at the end of the lease, sometimes even if they were in a poor state of repair at the beginning. It is important to understand the liability you are taking on here by getting a full survey and even trying to negotiate a limit on repair works from the outset. Leaving it until the lease has ended, and the landlord has sent in his surveyor to assess the condition of the premises, is too late.

FRI –

A landlord will often describe the new lease on offer as this. This is another abbreviation, meaning Full Repairing and Insuring lease – i.e. the tenant must repair and insure the premises. Repair can include putting right any existing defects. The buildings insurance will be either your responsibility to arrange and pay for (likely if you are to occupy the whole building), or the landlord’s responsibility if the lease is part of a larger building (where you will refund the landlord a share of the premium).

Forfeiture –

The lease will typically contain a right for the landlord to take the premises back from you (repossess) if the rent is unpaid for a specified number of days or weeks and/or if you are in breach of any other condition in the lease. The landlord is entitled to simply change the locks if the premises are unoccupied. If paying the rent becomes a problem, you should communicate with the landlord as early as possible to avoid forfeiture and the loss of your business premises.

Rent free period –

The landlord may offer a short period of time as an incentive for you to take the lease which is rent free. This can be anything from a couple of weeks to several months. Often this will allow you time to fit out the premises, ready for your own particular trade to start once the rent becomes payable. Take time to check the average rent over the full term to calculate what the rent-free period will actually cost you. Although this period of time will be rent-free, it is likely that you will still be charged insurance and service charge costs.

Rent deposit –

If you are a new business or perhaps have a relatively short trading history, the landlord is likely to want some comfort that the rent will be paid in the future. A rent deposit is a sum generally between three and six months rent which the landlord holds in a separate account. This is in addition to the first month or quarter’s rent which will be payable on completion. The landlord can draw on the rent deposit if the rent is unpaid or you have failed to attend to some necessary repair works. If your lease is likely to be anything other than relatively short term (i.e. more than two to three years), ask the landlord to agree that the rent deposit sum will be returned to you once you can show satisfactory trading accounts and you have paid the rent without default over, say a two to three year period. Otherwise the rent deposit sum will sit in an account for the whole of the lease term.

Rent review –

Generally longer term leases, i.e. five years or more, have provisions for the rent to be reviewed. The review will usually be to the current market rent at that time. Landlords generally require the rent review provisions in the lease to be ‘upwards only’. This means that in a falling rental market your new rent will never be less than it was at the start of the lease term.

If you have an enquiry about Commercial Property, please contact Simon Oxley at sjo@wdavies.com, or one of his colleagues in our Property Department. (See our People page for details).

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