7 top tips for entering into a new commercial lease

Making the decision to grow or move your business is a big step and one that can be filled with both wanted and unwanted consequences.

Failure to fully understand what you’re getting into when you sign a commercial lease can mark the difference between the success and failure of your business.

Here are 7 things to watch out for when you’re looking for your next business premises, whether it’s an office, a light industrial unit or shop.

1. Understand your ongoing costs

Request a full breakdown of the annual rent and how it will be paid (ie annually, quarterly, monthly). Request details of estimated service charges for the maintenance/upkeep of the property, utilities, council rates, contents insurance and confirm if VAT is included.

If the lease is for part of a building, check the obligations for repair and for buildings insurance. The landlord will normally be responsible for the maintenance and repair of the exterior and common parts.

2. Check whether there will be a rent review

It is more common with leases over five years that the landlord would require a rent review. This means that after a fixed amount of time, the rent would be reviewed based on the market rate at that time and increased accordingly. Landlords generally require the rent review provisions in the lease to be ‘upwards only’. This means that when the market rent is falling, it will never be less than it was at the start of the lease term. In some cases, fixed increases can be agreed throughout the duration of the lease.

3. Find out if there’s a break clause

Either the landlord or tenant can request the right to terminate the lease before the end of the term providing a notice period is served. When acting for the tenant it is imperative that a break clause is unconditional to ensure that the tenant can bring the lease to an end as easily as possible.

4. Document the state of repair of the building

It is normal for a tenant to be responsible for the repair of the interior and exterior of the premises. With leases with a term of over five years it is very important to obtain the services of a surveyor to comment on the condition of the property.

Most landlords 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. One way to limit the tenant’s potential exposure to excessive repair bills is to have a schedule of condition prepared which would be added to the lease to confirm the condition of the premises and therefore, the tenant would not be required to put the premises in any better condition than as evidenced.

5. Plan alterations beforehand

Think about any alterations that you need to undertake within the premises to ensure that the appropriate permissions are gained before entering into a lease. Failure to do so could result in further legal costs. You may need to prepare & supply breakdown / plans of what you hope to do to the property.

6. Check your Security of Tenure (the right to occupy the lease after it expires)

When negotiating heads of terms you may hear the phrase “opting out of the 1954 act” or an “excluded lease”. This means that at the end of the term the you as the tenant will have no statutory rights to request a new lease and therefore would have to vacate the premises, unless both parties agreed to enter into a new lease. To enter into a lease that excludes the automatic right for renewal, a formal declaration would need to be entered into.

7. Find out whether you’ll need to pay stamp duty at the end of the lease

Firstly, check if stamp duty will be due on completion of the lease. Then you need to find out how much is due.

Stamp duty is applicable for purchasing a property (freehold purchase) but also when purchasing a lease. Stamp duty is payable on leases over 7 years or if the rent exceeds £150k inclusive of VAT over 5 years. There is a calculation that HMRC do and we use for each matter.

Choose the right legal partner

Commercial lease contracts are not a one-size-fits-all item.

Make sure that you choose a diligent legal partner and with a team who’s going to look out for your best interests.

Contact us at wds@wdavies.com or alternatively call today on 01483 744900