How to Negotiate a Commercial Lease – Common Pitfalls to Avoid
Negotiating a commercial lease for a new trading premise or renegotiating an existing lease may seem quite simple. And on the face of it, it is! You need to agree on the rental costs, duration of the contract, and each party’s obligations.
However, agreeing to blanket terms can leave you without a safety cushion if things go wrong or even mean falling foul of the small print and damaging your relationship with your landlord.
It’s highly advisable never to sign a lease, or any business contract, without carefully assessing the terms, clauses, and conditions.
In this guide, the business specialists at The Law Firm Group advise on some of the typical issues we deal with and how to ensure your commercial lease meets your expectations.
Signing a Commercial Lease Under Pressure
Lack of available space and rising property costs can be a significant challenge, but doing your homework and taking your time to inspect the premise in question is key.
You can uncover a surprising amount of information by visiting a potential rental unit and speaking to other tenants, such as:
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- Problems experienced by other businesses nearby.
- Checking the square footage, parking availability and loading space.
- Verifying times when accessibility may be compromised (such as industrial estate opening hours).
- Looking into the security available or any risks in the area.
- Inspecting the property’s condition, inside and out, especially in wet weather.
Location matters. Even if you’re finding it tough to rent a property in your desired area, focusing single-mindedly on this factor can mean you spend more than you can afford or perhaps can’t meet the needs of your staff and clients.
Take your time to assess the amenities on offer, and evaluate the maintenance services the landlord is offering – if you’re under pressure to sign a lease quickly or advised that there is competition from other tenants, it may be a red flag.
Understanding the Complexities of Your Business Lease Terms
When you’re satisfied that you have found the ideal premise and that the rental costs are appropriate for your business, it’s time to look closely into all of the associated terms in your rental contract.
Terms include several core pieces of information:
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- How long the lease runs for, and your options for extending the period.
- Break clauses – if you need to end the contract early, and any penalties or notice periods attached.
- Rent-free periods, often available at the start of a longer lease term, usually from three to 12 months.
- Maintenance obligations – the tenant will normally be responsible for much of the general upkeep, so inspecting the property first is essential.
- Repairs, and whether the landlord is committing to fixing any fundamental issues with the property before you move in.
- Alteration rights – can you add internal walls or remodel? Do you need written consent to make such adjustments?
- Is subletting allowed for all or some parts of the property?
- Service charges – sums payable to Landlord for insurance and maintenance.
- Future obligations – your obligations to the Landlord after you have assigned the lease.
- Land registration – leases over 7 years long have to be registered at the land registry.
At this stage, if you haven’t already contacted an experienced solicitor, you should do so before going ahead with the lease agreement.
Most landlords are prepared to negotiate the terms, but you’ll need to understand each provision and then compare that to your expectations to determine which elements require a discussion.
Failing to read the terms thoroughly and any unwillingness to negotiate could be detrimental in the long term.
It’s wise to think about how your trading structure or processes might change in a few years and whether the building will remain fit for purpose in its current condition.
Controlling Commercial Rent Costs
Pricing is undoubtedly one of the most important factors in your commercial lease, but forgetting about ancillary costs or additional charges could be extremely expensive.
While monthly rent and a deposit are typical landlord requirements, there are several other costs that you may need to incorporate into your budget.
Build-Out Costs
Some commercial landlords will offer to build out the space. Usually, that means adding internal partitions, replacing a roller shutter door, or perhaps upgrading the flooring so that the building is ready to move into.
If the landlord is stripping the premise back, they may expect the tenant to contribute to those expenses, so you need to clarify.
Don’t assume that a build-out will be solely the landlord’s responsibility! One option is to negotiate on reconfiguring or redecorating the space in return for a rent-free period, for as many months as it would take to claw back the amount spent.
Commercial Building Taxes
Some business units on long leases may be subject to Stamp Duty – and if you’re signing a contract for over seven years, you will need to register with the Land Registry and pay the appropriate fee.
Other cost considerations include council tax and other levies that might apply to commercial units in the local authority area.
Reinstatement Costs
While it’s common to think about the immediate future when signing a new lease, you should also have one eye on the future.
For example, if you intend to make alterations to the premise and have the landlord’s consent, will they expect you to cover the cost of restoring the property to its former condition when you move out?
It could be very costly if that includes things like reinstating suspended ceilings, removing walls or structural work.
Rising Rental Charges
Finally, make sure you understand whether the rent is due to change and if there is a fixed period built into your lease.
Multi-let buildings with several units are also typically subject to maintenance and insurance contributions towards the upkeep of common areas.
Where possible, these costs should be capped or fixed for the duration so you won’t suddenly be hit with rising costs.
Legal Advice When Negotiating a Commercial Lease
Professional advice is invaluable when you are negotiating a commercial lease – the points we’ve explored above give you a glimpse into the many complications that can arise if you aren’t confident that your lease terms are acceptable.
As your legal representatives, The Law Firm Group apply our years of business experience to comb through the terms of your tenancy agreement, identify clauses of concern, recommend negotiating points, and even liaise directly with your prospective landlord if you wish.
Please get in touch for more advice about the common stumbling blocks in commercial leases – and how to ensure you steer well clear.