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Issues, mistakes and pitfalls to look out for before you sign a lease

These are the main ‘hidden costs’ you will need to budget for or renegotiate before you sign. Some are then covered in more detail below.

  • Is VAT payable on the rent?
  • How much are you going to need to spend on utilities such as gas and electricity?
  • What are the applicable business rates?
  • What is covered in any service charge?
  • What are your responsibilities for repairs and maintenance? And will the building need major repairs that you could be liable for?

What are the insurance costs? Under some commercial leases the landlord pays the insurance, but the tenant then reimburses him. Usually this is not negotiable even if it costs more than the insurance you could have arranged yourself.

  • Moving: What are the full costs of moving your business to these premises? It is not just removal costs but also the amount you will need to spend to fit out the premises so that you can run your business from them. On top of this there will be set up costs for IT, telephones, stationery and signage.
  • Alterations: If the landlord and planning authorities have given permission, what costs do you need to allow for alterations to the premises (and do you need to allow for the cost of removing them in order to put the building back to its original condition at the end of the lease)?
  • Rent reviews: Is there a risk that a lease that may seem good value now could become very expensive and difficult to get out of? Can better terms be negotiated now (before the balance of power shifts to the landlord once you have taken the lease)?
  • Break clauses: Is the break clause one that you could actually comply with if you needed to? Also does it penalise you perhaps with rent still being payable for a period beyond the break? Does the lease allow the landlord to exercise a break clause before the end of the lease – forcing you to incur the costs of relocating your business and potentially causing a large disruption to your operations?
  • Deposit: Make sure you understand the conditions relating to the rent deposit (the landlord’s security against you failing to pay the rent or comply with other terms of the lease). In particular make sure the lease is clear about the basis on which your deposit money will be returned to you and what happens if the landlord sells the premises to another landlord. You may want to consider negotiating to get interest paid to you on the deposit and that the landlord holds it in a way that it is protected if the landlord became insolvent (e.g. stakeholders account).
  • Personal guarantee: If you are asked to give a personal guarantee, you should try to avoid this if possible. You need to be sure that the lease is clear about what the guarantee covers and when the landlord has the right to call on it and how it would affect you personally if this happened.
 

Check the premises have planning permission for your planned business use. The current occupier may be in a similar business – but that does not guarantee that they had permission or the local authority would grant the necessary change of use to you.

Get this wrong and you may find you have a binding lease to continue to pay rent but be forced to vacate the premises, incurring removal and fitting out costs and rent for replacement premises (assuming you can find a suitable replacement at short notice).

So if you need planning permission for your intended use you must make your agreement to take the lease conditional on the local authority granting the necessary permission.

 

It is not just the planning authority you need to be careful about – it is also your landlord.

You need to be clear, not only about the activities you carry out now but also your future plans and how your business model is likely to develop over the years. This is not just your planned business activities but also additional services or facilities you may wish to offer (for staff or customers – such as a café).

You also need to think through issues like any changes you may want to make to the premises, the materials you would like to store on site, the hours of operation and the customers and suppliers who will visit your premises. All of these may be restricted by the lease.

So, make sure the lease allows for the activities and purpose of your business, now and in the future.

Where you will need to make changes to the premises to develop your business? Discuss these before taking the lease and get the landlord’s written agreement to them. And check if the lease requires you to return the premises to their original condition (which if you do not negotiate, a change could be an expensive extra cost).

 

You need to check whether it is you or the landlord who is responsible for compliance with the many laws and regulations concerning business premises, such as: disabled access, health and safety for staff and customers, legal changes to protect the environment and planning laws.

Even if a building is currently compliant, if a new law were introduced, then would you have to meet the cost of adapting the building to be compliant and meet the new obligations?

Leases often require tenants to comply with statute at their own cost. You will need to consider if what is required of you is justifiable depending on how long you plan to stay in the premises.

So, before you become liable, get written confirmation from the landlord that the property is currently fully compliant with all applicable regulations (statutes and statutory instruments).

You may also need advice on the likely cost of compliance and any planned new laws that have already been announced.

 

Ideally you will want to negotiate an arrangement where you have the potential for a long lease, so you can  focus on growing your business rather than having the cost and inconvenience of moving. Longer leases also tend to have lower rents. The ideal solution is to have the option to get out early and the option to extend for further periods.

If you are a new business, you do not want to be saddled with a long lease if your business struggles to take off. But if you only have a short lease there is no guarantee the landlord will grant you a further lease or favourable terms.

Instead, consider going for a longer period but negotiating a break clause. Make sure the terms for you using the break clause are clear and achievable by you. Also make sure there are no hidden costs, so it allows for you to only pay a proportionate amount of rent up to the date of the break.

Even if you are an established business you cannot always predict market changes and will want options. Having the right to apply for a renewal lease is called security of tenure. Having this right also adds value to your business. Some rights of security of tenure are given by law unless under the lease you agree to ‘contract out’ of benefitting from them. Security of tenure is complex and we will advise you.

Does the lease give you permission to sub-let? If your business goes through a downturn, and you do not need the full premises, then being able to sub-let part of the property can be a lifeline to your cash flow.

 

It is sensible to agree with the landlord that surveyors should be appointed to prepare a report on the condition of the premises before the lease starts. It should also cover the condition of fixtures and fittings provided. This will include photographs. At very least you should make your own (dated) photographic record. You and the landlord should both agree the report (and keep a copy). This will help to avoid disputes about who is responsible for any damage and provide a useful record for when the lease ends, if you are obliged to return the premises to their original condition.

 

Make sure the lease is clear about who is responsible for repairs, redecoration and maintenance of the property. This could be included in a service charge or be specific requirements under the lease.

If it is you, then you will need to take account of this extra cost in your budgeting. If it is a building with several occupiers, then if you are partly responsible for repairs to the building, then make sure you are only responsible for a fair proportion of the costs.

Depending on your responsibilities under the terms of the lease, you may want to negotiate for any major repairs needed to be completed before your lease starts.

 

The premises you are thinking of renting may be shared with other occupants – perhaps they form part of a business development or a unit within a larger building. Then there are some additional considerations:

  • Is the lease very clear about what you will be renting?
  • Do you have shared access to facilities such as meeting rooms, toilets and a staff kitchen?
  • Are you allocated specific parking bays?
  • What are the permitted methods of getting into your premises?

So, make sure an up to date plan is provided and referred to in the lease that covers these points to avoid disputes with the other occupiers.

  • Is the lease clear on the service charge made for maintaining shared facilities?
  • How are these costs calculated?
  • What do they cover?
  • Are there any additional costs not covered? For example, are you expected to contribute to potential costs such as repair or maintenance of the roof and structure of the building?

Finally, if you are responsible for repair costs make sure your contribution is fair and in proportion to the number of other occupiers.

 

A commercial lease can have a significant impact on the finances of a business. It is not a decision to rush. Costly mistakes are easy to make.

If you are not experienced at reading and negotiating the terms of commercial leases, it is easy to fail to realise how an innocent looking clause hidden in such a long document can have such a negative impact on your business.

The best form of protection is to take advice from one of our experienced solicitors specialising in commercial leases. They can review the terms with you, alert you to potential problems and suggest alternative clauses before you sign and are legally bound.

Use our Free Initial Assessment service – you can talk through any concerns or questions you have with one of our specialist business property lawyers. We will help you understand the likely costs, timescales and any risks associated with the transaction.

Have a question or need some help? Call 0808 274 7557

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