Pick up the papers or switch on your television and all we seem to hear about at the moment is how badly the economy is doing. Some experts predict that the ‘credit crunch’ may well turn into a full recession which could last for two years or even longer.
What is clear, however, is that we are facing uncertain times and no-one can be sure when things will pick up. Businesses must therefore plan ahead now and work out how best to minimise their liabilities and retain flexibility.
One concern to most businesses will, of course, be the cost of its business premises and they will want the ability to be able to downsize and adapt to market changes. Below are 7 tips on what you should consider before entering into or renewing your business lease.
1. Consider a shorter lease term – We are already seeing evidence of tenants taking on shorter-term leases. For example, a lease of 5 years rather than say 10 years reduces your period of commitment and the overall amount of rent your business has to pay over the lease term. Shorter leases also mean that the amount of Stamp Duty Land Tax you have to pay is usually less. Furthermore, leases under 7 years do not have to be registered at the Land Registry so there is less ‘red tape’.
Note, however, that shorter leases are generally unlikely to have security of tenure under the Landlord and Tenant Act 1954. This means that you will not have a statutory right to renew your lease when it ends which could put your Landlord in a better bargaining position when it comes to renewing your lease if your business relies on its location.
2. Negotiate a break clause – A break clause can provide flexibility and assurance if your business is experiencing a downturn. By negotiating a break clause, it means that you can end your lease by giving written notice to the landlord at a specified future date (or dates). This will usually be conditional on paying the rent and making sure you have complied with your other lease obligations. If the break clause is not exercised, then the lease continues as normal.
Be careful though as, if you do decide to break your lease, you must serve a notice in the exact manner set out in the lease and ensure that you have complied with your lease obligations. Tenants can get this wrong resulting in litigation which can be very expensive!
3. Check the alienation clause – If your business takes a turn for the worse, make sure you can assign (i.e. sell) the lease or sub-let the property. Most commercial leases contain these so-called ‘alienation’ provisions but it’s best to check that there is nothing onerous which prevents you from offloading your lease. Make sure that the landlord’s consent cannot be unreasonably withheld or delayed.
4. Rent review clause – If there’s a rent review clause in your lease, negotiate one that’s linked to the RPI rather than an upward only review. This will give you more certainty when it comes to rent review rather than leaving the gap open for an uncertain increase in rent.
5. Ask for rent-free periods – Landlords are increasingly agreeing rent-free periods to ensure that a tenant takes a property on and settles in during the initial months, so don’t be afraid to ask for one. If there’s a break clause in the lease, you could also request an additional rent-free period if you do not exercise a break. This provides an incentive for the tenant to stay at the current property whilst saving the Landlord from going through the often long and painful process of finding a new Tenant.
6. Cap the Service Charge – Service charges can often add a substantial amount to the cost of a lease in addition to the basic rent. Ask for the service charge to be capped during the lease term so that you know what the maximum amount is which you will be paying.
7. Limit the repairing liability – Most commercial leases contain fully repairing covenants which means that the Tenant must keep the property to a high standard which can have financial consequences. Depending on the condition of the property, try and limit your repairing liability by reference to a schedule of condition so that you don’t have to put the property into any better state of repair at the end of the lease term. This makes even more sense if you are only taking on a short-term lease.
Remember that you are operating in a buyers market at the moment and there are several commercial properties that are currently vacant. A Landlord would rather have a tenant in occupation, paying rent and preventing the risk of squatters rather than own an empty property.
And perhaps the most important tip is that you should always seek professional advice!
If you are a tenant or a landlord and require plain English legal advice on a commercial lease or any other property issue, then contact the Commercial Property team at Clarkson Wright & Jakes Ltd on 01689 887887 or see our website at www.cwj.co.uk