Knowing how to negotiate a commercial property lease is important when you start looking for a new business location.
Finding your ideal office, warehouse, factory or industrial unit takes time. You need to find somewhere in the right location that has the amenities you need at an affordable rent. This may take you months of work. So, it can be tempting to bring it to a rapid close by quickly negotiating the rent and signing your commercial property lease. However, it is imperative that you take the time to negotiate favourable terms in your commercial lease agreement.
Many business owners and directors think that the main point is the rent. While this is important, there are several other factors that you need to consider. Your lease is one of the biggest outgoings for your business, and dependent on the lease terms can bind you to its obligations for a number of years. So you must ensure that your lease terms are acceptable for its duration, hence negotiate a commercial property lease that will benefit you and not hinder you in the future.
Unwary business owners and directors may find themselves miserably locked into unfavourable terms with little hope of improving their deal.
When in negotiations, your negotiating power depends on several factors:
- The state of your local rental market. For example, The RICS (Royal Institution of Chartered Surveyors) Q1 2017: UK Commercial Property Market Survey shows that availability in the industrial sector continues to decline giving more power to landlords while office and retail demand remains mixed. Your negotiation power can depend on what is happening in your local area as well as the size and nature of your business versus that of your landlord.
- How to negotiate a commercial property lease, and what this actually consists of.
Negotiating a commercial property lease is an art. Landlords deal with commercial leases regularly and either have an in-depth knowledge of the process, or work with agents to ensure that they get the most favourable terms. This can lead to a tenant entering into an unfavourable lease without fully understanding its terms and the implications for their business.
You can tip the scales in your favour by working with a knowledgeable commercial property solicitor who knows how to negotiate the best deal for you. If you are looking to negotiate a commercial property lease then we recommend that you contact our Commercial Property team.
In this article on how to negotiate a commercial property lease, we will cover:
- Key Takeaway Points
- Research Before Your Negotiate a Commercial Property Lease
- How to Get a Rent Free Period
- Commercial Lease Break Clauses
- Your Commercial Property Lease Checklist
- How to Negotiate a Commercial Property Lease
- Why Else?
Key Takeaway Points
- Before you meet to negotiate your new commercial lease, you must do your research so you can work out your ideal deal and your fallback position. Your ideal deal is the best deal you can realistically achieve. This is your opening position in the negotiation process. Your fallback position is the “worst deal” you are willing to happily accept. You must do your research and work out these two things. It is vital that you know your fallback position- if you don’t, you can end up tied into a lease with unacceptable terms for a long length of time.
- In negotiating a commercial lease, there are several key issues to be considered. One of these is whether a rent-free period could be agreed, which are seen in commercial leases. Landlords may be anxious to find tenants (particularly in brand new premises or on business parks for example to encourage tenants to take a lease) and will frequently agree to significant rent free periods to avoid having to pay business rates themselves. If you consider that your Landlord is either struggling to find tenants, or you are a tenant who is one of the first to show interest then it is always worth trying to negotiating one. Dependent on the Landlord and nature of the premises, you can see rent free periods from 3-12 months.
- Another key consideration is a break clause. This is a clause that allows a lease to come to an end prior to its contractual end date. There are numerous situations where you might want to have a break clause in the lease, especially where the lease of the premises represents a new venture, is in a new or unfamiliar area, or where you are uncertain of market conditions. For example, you commit to a five-year lease on a shop with a break clause which can be triggered after two years. There are various types of break which can be agreed. It is important that you seek legal advice on this, as the terms of your lease may make it difficult for you to exercise your break clause, and in the case of tenant only breaks, the Landlord will have strict requirements to enable you to break the lease.
- Repairs and alterations. You should always check these obligations as these clauses will detail your obligations during the term of the lease and what condition you need to keep the property in. Be very wary if you see the words “to put and keep” This means that you are responsible for putting the property into a good condition and then maintaining it. All leases expect you to keep the property in a good condition but should not require you to put it into one- this is your landlord’s job.
- Who is taking the contract and for how long? Will the Landlord insist on a guarantor? Finally, you must consider who is signing the Lease- a company or an individual. A Landlord may ask insist on a guarantor under the terms of the Lease.
- Will you have an automatic right to stay in the property after the end of the lease? If your Lease falls within the Landlord and Tenant Act 1954, this means that at the end of your Term, you will have a right to apply to Court for a new Lease unless the Landlord objects. The Landlord can only object on certain specified grounds. However, in nearly all cases, the Landlord will seek to exclude sections 24-28 of the Landlord and Tenant Act 1954 “Contracted Out Leases”) meaning that you will have no automatic right. In Contracted Out Leases, there will be specific matters you must attend to, to return the property to the Landlord. Failure to do this can mean that even if you do not want to remain in occupation, you could be deemed to be so.
When you negotiate a commercial property lease, it can be complex and difficult. We highly recommend that you seek the advice of a commercial property solicitor with experience in this area. Our Commercial Property team are well-respected expert in this area and will be happy to answer any queries you may have.
Research Before You Negotiate
This is a vital step which is often overlooked. You must do several things before you negotiate a commercial property lease.
- Research the local rental market. It is important that you know the condition of the local rental market for the type of property you want. For example, industrial property maybe at a premium whereas office space is cheap in your area. You can get a general overview of the rental market sector from the Royal Institution of Chartered Surveyor’s web site at www.rics.org. However, you do need to look locally as well. Remember to include researching the availability of rent free periods- usually referred to as tenant inducements.
- Research the landlord. It is useful to do some research on your prospective landlord. It is ideal if you know someone who is one of their tenants so they can give you an idea of whether or not you want to have them as your landlord. The quality of landlords varies greatly and a little bit of research can save you a lot of headaches in the future. In respect of the landlord and the local rental market, it may be worth discussing this with a local surveyor or other rental agent who has the appropriate local knowledge.
- Know the important clauses and things to watch out for in a commercial lease. This article covers the key things to look for but you do need to be careful of the wording and read your lease properly. Remember it is the landlord’s solicitor who draws up the lease so it will be in his favour. We highly recommend that you have your lease reviewed by your solicitor before you sign it.
How to Get a Rent Free Period
There are several points you can use in your negotiation to obtain the maximum rent-free period.
- An incentive to get you to take the lease
By doing your research, you will know how keen the landlord is to rent their property. If their building, office, warehouse, shop etc. has been empty for some time, they may be desperate to get rid of it and willing to offer you an extended rent-free period to do so. Even if the property is in demand, you can still request a rent free period for the below reasons.
- Helping You to Get Started
This might seem like an odd one but it is important your business is a success if the landlord is sure to be paid. Landlords will ask for personal guarantees to increase their chances of rent payment. However, even with guarantees in place, they may not get their rent if the business fails. It is far better for all concerned if your business is a success- this includes you renting the property for many years to come.
The most difficult times for any business are in its formative years and when it is moving into a new area. Your landlord will understand this and he may be amenable to helping you to establish yourself with a rent-free period.
- Compensation for Your Fit-Out
Few properties are ready for you to just walk into and take over. They may require minor cosmetic work (e.g. branding, painting etc.) or extensive fit outs to accommodate your business. In either case, there will be a period where you are renting the premises but cannot use them for business and need to pay for the fit-out work to be done.
Most landlords will give you a rent free period to allow you the time and money to make the needed changes and move in to your new premises.
- Compensation for Dis-repair
If there is any disrepair at the property, it is a good idea to ask the Landlord to fix it before you move in. However, it often makes sense to fix it while doing your fit out. You will pay for the repairs but can ask for a rent free period to cover the cost of them. You should also check if the building is compliant with the various regulations. If not, then the cost of making it compliant should also be discussed.
A surveyor or builder can be very useful here. They will be able to point out all the repair and/or compliance works that will need to be carried out and their cost. This will put you in a much stronger bargaining position when you meet with your landlord to negotiate your lease.
Negotiate a Commercial Property Lease Break Clause
There are various types of break clause which can be included in your lease. A break clause can benefit either of you or both:
- The break right may just be for you. You need to check the lease carefully for the terms of doing so as these can be stringent.
- The break right may be for the landlord only.
- Occasionally the right to break will be mutual and thus exercisable by both of you.
The right to terminate a lease early will usually employ one of the following triggers:
- The right to terminate on a specified date.
- The right to terminate at any time on giving an agreed period of advanced notice (known as a rolling break).
- The right to terminate at any time after a specified date.
In all cases, you will be required to give notice (usually 3, 6 or 12 months) and comply with other conditions, including (but not limited to) payment of rent, any outstanding sums and vacant possession.
While a rolling break clause is most advantageous to you, it is rare for a landlord to agree to this. The most common one is right to terminate on a specified date provided you give notice to do so.
You will need to consider how important it is for you to be able to vacate the property early, and if appropriate negotiate a break clause.
Your Commercial Property Lease Checklist
In addition to the above, you need to discuss the below factors in order to negotiate a commercial property lease efficiently:
Guarantor- who is acting as the guarantor for the rent. Most commercial tenants sign the deal on behalf of their company but if you are a new or small business then it is likely that your landlord will require a personal guarantee. If there are several of you in the business, then this would be the individual who is the most financially secure. You should discuss and agree who will act as your guarantor before you meet the landlord. Any guarantor undertakes to comply with the tenants obligations under the lease – including payment of rent and all outgoings. If you are asked to provide a guarantor, then your guarantor will need to ensure that they are fully aware of the terms of the lease, its potential financial implications and the effect it may have on their future plans.
Repairs– you should try and limit your repairing obligation. You want to avoid a “put and keep” in good condition clause.If you have agreed to carry out works to the property, to bring the property to an acceptable level of repair, you should cover this off under a separate agreement with the landlord.. It is also adviseable to have a Schedule of Condition inserted into the lease. This is a record of the condition of the premises at the start of your occupancy and makes it clear that you are not required to put the property into a better state of repair than is was when you took it on.
Alterations – you may wish to take a lease of the premises and immediately carry out works to the premises which ordinarily would breach the terms of the lease, or which would require the consent process under the lease to be adhered to. It’s common to see a licence for alterations agreed at the same time as the lease to ensure that you already have the Landlord’s consent before you take occupation.
Landlord’s legal costs- each side should pay their own legal costs. Sometimes, your landlord might ask you to pay their legal costs. You do not have to do this but it may form part of your negotiations.
Right of re-location- Your lease may include a right to re-locate you. If it does, then it needs to include the amount of notice that you must be given, how many square miles the new property will be from the existing one and that your landlord will provide the same amenities. This may be fine for a warehouse or back office but not for a shop or main location. If you do not want this clause in your lease then you should negotiate this with your landlord.
VAT – it may be that the Landlord has “opted to tax” on the property, and as such you will be required to pay VAT on the rent. Dependent on the level of rent payable per annum, this can lead to additional costs, which you may not have anticipated. You should seek appropriate advice from your accountant in this regard. Note that VAT payable on any rent will also have an effect on the level of stamp duty land tax (where appropriate) payable as this is taken into account in calculating the amount (if any) you must pay to HMRC on completion of the lease.
Option to buy the freehold– you might want to include this in the lease as your address gives you goodwill. This usually only applies to very long standing tenants but you may want to ask to include it in your lease.
How To Negotiate A Commercial Property Lease
Negotiation is a process involving two companies who are looking to come to a mutually beneficial agreement. It consists of 6 key steps:
- Preparation- you need to do your research and work out the best deal that you can expect to get and the worst deal that you are prepared to accept (known as your fallback position) before you start to negotiate a commercial property lease.
- Opening positions- at the start of your meeting you should set an agenda and share your respective starting points (i.e. the best deal you think you can achieve). Be realistic- avoid starting too low or too high.
- Proposal stage- this is where you agree the factors that you want to discuss and find out which ones the other side is prepared to move on. For example, many landlords will not lower the rent but may be willing to bargain around a rent-free period.
- Bargaining- this is the main stage where you trade off one factor against another and discuss all the key points.
- Closing the deal- Negotiations can involve the juggling of various factors but it is important that you close the deal at a reasonable point.
- Final Agreement- you have now reached an agreement. It must be communicated to both parties and the lease drawn up. This will invariably be by the landlord’s solicitor and we recommend that you have it checked by your own solicitor before you sign to ensure it covers what you agreed and is prejudiced against you.
Knowing how to negotiate a commercial property lease is a skill and an art. We recommend that you use an experienced professional to help you through the process.
How we can help
Else is a modern, dynamic and forward thinking solicitors practice who have the expertise you expect from a large, traditional law firm.
You will discover that we are different to other legal firms. We will help you sort out your situation and then look at other ways that we can add value to your company. This could include introducing you to new customers or suppliers in our extensive network or offering you some new insight into your market or your business.
Else Solicitors has an enviable reputation for always going the extra mile and offering a personal, jargon free service. Your business is not only in trusted legal hands but will also benefit from our extensive business knowledge, experience and contacts.
If you are wanting advice on how to negotiate a commercial property lease, please contact our Commercial Property team on 01283 526 200.