Considering entering into a commercial lease? Consider the length of your lease!
When negotiating a commercial lease there are a number of factors to take into consideration. This article will focus on the importance of selecting an appropriate term for your lease and fully understand its implications.
A lease is the grant of a right to the exclusive possession of land for a pre-determined period of time, therefore the duration of a lease needs to be fixed and certain before the lease takes effect. The length of a lease can range from 1 day to 999 years, although typically commercial leases fall for a period between 1 to 25 years.
You should note a lease is a binding contract, the length of term you agree is the period you are expected to pay your agreed annual rent and other costs for the building to the Landlord. There is therefore a potentially substantial financial commitment without buying an asset!
To have a successful lease, it should meet the objectives and needs of both the Landlord and Tenant. The importance of an appropriate length for a lease can be highlighted in the following examples. It would not be suitable for a tenant who knows that they want to relocate or expand in the not too distant future to take on a 25 year commercial lease that would tie them to one location. Nor would it be appropriate for a Landlord to enter into a one year term, if it is looking for longstanding tenant. Therefore the term of lease needs to be fit for purpose for all parties involved.
Yes, leases can be sold (assigned) or underlet, but this can be a slow, time consuming and expensive process; you also need to find someone that will accept the terms you have agreed with the Landlord – they will be taking these on! It is better to get the right property for the right length of time, as far as possible.
Additionally, there are various external pressures to take into consideration when negotiating the length of a commercial lease, such as Stamp Duty Land Tax (SDLT) implications. The amount of SDLT payable increases on the duration of lease; simply speaking, the duty is calculated by multiplying the rent by the number of years of the lease. Therefore a Tenant may be inclined to take a short lease with an option to renew in comparison to a long lease with a break clause. It should also be noted a lease of over 7 years will need to be registered at HM Land Registry, incurring an additional cost.
A break clause is a provision within the lease enabling either the Landlord or Tenant (or both) to determinate the lease earlier than originally agreed. This right may be exercised either on specified dates noted in the lease or at any time of the term, known as a rolling break. This is something that could be considered when negotiating a lease.
To conclude the length of lease, ultimately depends on the objectives of both the Tenant and Landlord with commercial factors taken into consideration. If one party is more keen to get a deal done, they are likely to concede terms that are not 100% to their liking. A desperate tenant for example will probably take whatever term the Landlord wishes to grant to get into the property.
Agreeing the terms of the lease is not a simple task as there are so many factors to consider. Follow our commercial property expert’s monthly articles for more information and solutions to each of the common property related issues. Our next edition will cover ‘Rent Reviews’.
If you would like to discuss your commercial property matters, please contact email@example.com or call him on 01283 526 205.