The lease you sign to take occupation of your workplace defines the financial relationship with that property and also sets out your rights, obligations and benefits.
Accordingly, it’s vital that the lease reflects your business plan and supports your operational needs.
For example, if you are not sure that the area you have chosen will be the long-term home for your business then there is little point in signing a lease that financially binds you to the property for 25 years. Conversely, moving your business can be a disruptive and expensive process so you don’t necessarily want to take too short a lease which, whilst not committing you for a long time, could expose you to the risk of having to move too early.
All the clauses that you will find in a property lease will have some relationship with your business so it is important your requirements shape the lease and not the other way around.
When you begin to look for your new workplace you should start thinking about what the ideal lease would offer. Once you have an appointed an agent to assist with your search then you should start having detailed discussions with them about what you want. They can give you a perspective of what’s typically available in the prevailing market place conditions and an idea of what your strategy should be. It may be that market conditions dictate that you will not be able to get all the terms you want but it is good to start out with a "wish list".
It is essential once you get to the negotiation stage to engage a solicitor who has experience of drafting commercial property leases. When you have done this you will have an agent who can advise on what is commercially available in the market and a solicitor who can ensure that a lease best protects your interests and is drafted to reflect the terms you have agreed.
The main aspects of the lease to consider are:
Rent
How much are you prepared to pay and how can you best protect against future uplifts?
Typically, property leases stipulate that the rent should be reviewed every five years and adjusted to the prevailing open market rent for your property. The landlord will invariably want these reviews to be "upward-only" (i.e. the rent can go up or stay the same but not go down) but it is possible to structure a different mechanism in the lease. Future rental increases can be "stepped up" at a precise level that is specified in the lease or linked to an agreed benchmark (for example, the retail price index). There are many nuances in this area and your agent should supply you with a full range of options and indicate to what extent they are available in the current market.
Similarly, depending on market conditions, there may be incentives available to occupiers to take space. These are typically the grant of rent-free periods, a cash premium or a payment towards your fitting-out costs. They are not always available and depend on the strength of occupier demand in the market but your agent should supply you with an overview of what is available commonly and specifically with regard to the properties you have shortlisted.
Rent should not be seen as the only direct cost of occupation. Business rates and the service charge levied by the landlord are the other main components of occupation cost and must always be factored into financial calculations throughout a lease term.
Lease length
Few businesses can look into the future beyond three or four years with any certainty, but property leases often stipulate that you commit for much longer than that.
As mentioned above, this has advantages and disadvantages as it offers security but also a long-term commitment. It is essential that you think about how long you want or need to commit to a property.
Ultimately, this will be a process of reconciling your needs with what’s on offer in the market. However, you can negotiate lease features which give you both the security you need and the opportunity to exit before the end of the lease if required. These are called "break clauses" and identify set times in the lease when you can opt out of your lease. These can be useful in the event of your business heading in a different direction. However, as they potentially impact on the landlord’s cashflow from the property they are likely to require either a higher rent or some other form of financial compensation to reflect the fact that you can break your lease.
Security of tenure
The powers of the Landlord and Tenant Act 1954 gives tenants automatic rights to renew a lease when it expires. However, it is common practice to have leases agreed "outside the Act" where it is accepted by both landlord and tenant that these rights should not apply. In every instance, it is advisable at the outset of negotiations to establish whether or not the proposed lease will be subject to the Act.
To determine which route best serves your business interests, confer with your agent and solicitor about the implications, advantages and disadvantages of each option.
Repairs and Reinstatement Obligations
The lease will set out the tenant’s responsibilities with regard to both the ongoing maintenance and repair of the property’s fabric and also Reinstatement Obligations. These obligations detail reinstatement works that will need to be addressed by the tenant when the lease expires. These works are intended to put the property back into the condition that it originally was when first leased.
Usually six months prior to the end of a lease the landlord will provide a schedule of reinstatement which will enable the tenant to carry out required works (or pay a proportionate cash sum in respect of the works).
The exact extent of your repair and obligations can have substantial financial consequences and should be discussed in detail with your agent and solicitor. Directory
The Landlord & Ongoing Management
As part of the due diligence process regarding your prospective new property, it is worth trying to find out something about your landlord and their commitment to occupier service.
Try to determine what relationship the landlord seeks to have with their occupiers and whether they adhere to The Code for Leasing Business Premises in England and Wales 2007.
The code aims to promote fairness in commercial leases, and recognises a need to increase awareness of property issues, especially among small businesses, ensuring that occupiers of business premises have the information necessary to negotiate the best deal available to them. It is the product of a collaboration between property professionals and industry bodies representing both landlords and tenants (for more details see leasingbusinesspremises.co.uk).
Similarly, if the landlord has a website take a look and see how they view the landlord-tenant relationship. Your dealings with them will not end when you sign a lease and their commitment to service and support where required will be an important factor in the smooth running of your workplace.
Remember that you will not be able to control the entire environment and servicing of your property. This will be handled by the landlord’s ongoing management regime for the property. The upkeep of the common parts, building security, reception areas, lifts and waste management are just some of the areas that you may be paying for through the service charge. If they are not managed professionally and efficiently they can impact negatively on your business. Ask for details of how the property is managed, who is responsible on a day-to-day basis (the landlord will often employ a third-party managing agent) and what provision there is for 24/7 reactive and pro-active management.
The quality of ongoing management can have a major influence on your business continuity.
Other issues for consideration
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The following issues – whilst not as fundamental to the lease structure as those above – should also be discussed and a position on each identified:
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- Assigning and subletting: in the event that you might want to quit the property determine what your rights are to assign the lease or sublet the space to another party. Be aware that assignment or subletting will not guarantee that you don’t have a continued responsibility for the lease should your assignee or sublessor fail to meet their obligations.
- Notice period: the lease will stipulate what notice you need to give if you intend to exit the property.
- Rent deposit: you may be required to lodge a deposit with the landlord when you sign the lease. Establish how much this is (it can be negotiated), where the deposit will be held and what interest will accrue so you can ensure that the appropriate amount will be returned on expiry.
- Insurance: what are you responsible for and what does the landlord cover?
- Corporate Responsibility: to what extent does the management and sustainability strategy for the property match your business’s own Corporate Social Responsibility and Environmental policies?
- Signage: what rights and opportunities do you have to display your business identity on the property?
- Confidentiality: if you don’t wish the details of your occupation of the property (rent, lease length, incentives etc) to be released to the media you should ask for a nondisclosure/ confidentiality clause to be put in the lease.
Next steps
Once you have signed the lease on your new workplace you can begin the process of fitting-out the space according to your requirements and planning the move from your existing workplace.
What to consider when fitting-out and relocating your business can be found in the sections: Relocating and Planning and Fitting out your workplace : planning your move and avoiding business disruption.