During my 20-year career as a commercial property lawyer, I have been contacted by a lot of business owners in need of urgent legal advice because they are trapped in a lease they cannot afford or have received a demand for unforeseen costs from their landlord.
Experience has shown me that there are 5 areas in particular which can catch a tenant out. By understanding a bit more about these potential pitfalls before you begin negotiating terms for a commercial lease, I am confident you will be able to make significant savings for your business or at the very least ensure that you have a full picture of potential costs going forward for budgeting and cash flow purposes.
1. Rent
There are a number of things to keep in mind when reviewing the rent provisions of a lease:-
- frequency of payments (likely to be quarterly in advance but monthly/weekly payments may be preferable for cashflow);
- whether or not there is a rent-free/reduced rent period (particularly if works are needed to the property when you go in);
- whether or not the rent is to be reviewed (and, if it is, when, and how? Are you satisfied that the review mechanism works?)
These are all terms which the landlord may be prepared to negotiate on, even if he does not advertise the fact at the outset.
2. Repairing Obligations
Repairing obligations are notorious for catching people out and many tenants are shocked to learn that their liability is far greater than they realised. I cannot stress enough how important it is to check the specific wording of the lease and make sure that you know exactly what you are responsible for.
If left unchallenged, there is a real risk that the terms of the lease will not only require a tenant to keep the premises in good repair but actually require them to put the property into good repair, even if it wasn’t in good repair when the lease was entered into.
There are measures available to protect your position if you obtain proper legal advice as early as possible.
3. Service Charges
As with repairing obligations, tenants often do not understand the extent of their service charge liability. Even if a tenant is leasing a small part of a building, they could be responsible for contributions towards extensive structural repairs.
I would advise that a tenant should always:-
- request a copy of the last 3 years’ service charge accounts to see what has been charged in the past;
- enquire whether there is a sinking fund available;
- find out whether the landlord is aware of any items likely to require significant expenditure in the next 3 years;
- consider asking for a cap on the service charge.
4. Length of Term / Break Clauses
Deciding how long to commit to a lease is a big decision for a tenant, particularly in today’s uncertain market. In order to try and minimise the financial risk associated with a longer term, a tenant may wish to request a break clause; something which, if exercised, would allow the tenant to terminate the lease before the end of the agreed term.
However, please remember that tenants are required to pay SDLT based on the full length of the term (irrespective of any break date in the lease) and are not entitled to any refund from HMRC in the event that the lease is brought to an end sooner.
5. Alienation
Not as exotic as it sounds, alienation is a term used to describe the process by which a tenant passes the lease on to another party. Many people believe that a tenant can sell on its lease whenever it wants to but that is not necessarily the case.
In the event of a sale, it is likely that the landlord will require the tenant to enter into an Authorised Guarantee Agreement (AGA). An AGA will usually require the original tenant to guarantee the performance of the ingoing tenant, meaning that they could be required to make future payments if the ingoing tenant fails to perform any of the obligations under the lease. In some circumstances the original tenant can actually be required to take the lease back on.
Obviously, this is not an exhaustive list of the potential risks facing a tenant of commercial premises. Early discussion with professional advisors, including your lawyer, will help to make sure you identify any potential issues from the start and that measures are put in place to protect you and your business for the duration of the lease and beyond.
For more information on this or any other real estate matter, contact Victoria Walton on 0191 384 2441 or email vew@swinburnemaddison.co.uk.
