How to negotiate a commercial lease

It is important to understand key points as either a landlord or a tenant when negotiating a commercial lease so you can have a clearer understanding of your options. Once the key points are agreed these are set out in a document called “Heads of Terms” and used as a basis to draft the lease.

Below is a brief overview that considers the essential elements of Heads of Terms and the approach you might take in the negotiation, depending on whether you are landlord or tenant.

The initial rent

It is important to ensure the initial rent is set at the right level, as this will be the starting point on which any future rent reviews will be carried out. A landlord will want rent to be as high as possible whilst the tenant is likely to argue for a lower sum.

To achieve a fair rent, there are a number of factors to take into consideration. The tenant should check the rental values of other similar properties in the locality and compare these to the property it is attempting to lease. Break it down into rent per square foot and compare that to similar properties in the same locality.

From a landlord’s perspective, irrespective of the rent being paid in the locality, there may be an argument that the property is unique, or that rental property may be scarce in that particular location. This tends to lead to a higher rent being demanded by the landlord.

Rent reviews

Check whether there are any rent reviews when they will take place and on what basis.

Rent reviews can be linked to an index like RPI OR CPI or depend on the rent for comparable premises (open market value). Both parties need to ensure that the rent review mechanism is clear, workable and what happens when they are unable to agree to the increased rent.

Rent deposit

A request for a rent deposit is fairly common on the grant of a lease, depending on the tenant’s financial standing. Where the tenant is a start-up or does not have a solid trading history, the landlord might seek a rent deposit from the tenant to secure the lease. The tenant may want this to be time limited or released once the tenant is able to show profitability.

Personal guarantees

In addition to or in place of a rent deposit, the landlord might insist on a personal guarantee. This is most common when the tenant is a limited company, especially a newly formed limited company, or where the tenant does not have strong trading accounts.

A tenant may want to avoid personal guarantees as it can lead to the landlord taking proceedings against the personal guarantor if the tenant defaults on any condition contained in the lease. A compromise may be a higher rent deposit.

The length or term of the lease

The length of the lease is another essential term in the negotiations. From a landlord’s perspective, the aim might be to look for as long a term as possible if the tenant is of good quality with regular rent reviews. From a tenant’s perspective, the aim might be to look for a shorter lease incorporating break and extension options to allow them flexibility in their business plans should the location or facilities become unsuitable or if they outgrow the premises and need to move elsewhere.

Break clauses

Either party may seek to have break clauses inserted into the lease. This may improve the flexibility of the lease. The parties will need to agree who can trigger the break, the conditions and how much notice must be given to ensure the break takes effect.

Rent-free period

The tenant usually drives this to allow it to prepare the premises for trading. It is rare that any leased property will be absolutely ideal for the tenant to immediately commence trading. Invariably, fit out works will be required to the premises, so it is not unusual for a tenant to seek a rent-free period.

As far as the length of the rent-free period is concerned, it will depend on market demand for the type of premises, the strength of the tenant and the condition of the premises prior to commencement of the lease.

Repair obligations

The lease should be clear on who is responsible for which elements of repair and maintenance of the premises.

In a fully repairing lease where the obligations for repair and maintenance are placed on the tenant, it makes good sense for the tenant to prepare a Schedule of Condition of the premises at the start of the lease to enable the tenant to exclude any existing damage from the repairing obligations.

Alterations clause

If the tenant wants to make alterations to the premises prior to the start of the lease, the landlord might be amenable to carrying these out either at the tenant’s cost or at its own cost, should it believe that the alterations will secure the lease and/or if the alterations improve the capital value of the premises or enhance its marketability in the future.

The tenant should review the provision in the lease relating to alterations it might wish to carry out during the term of the lease. Check the notice requirements and what information the landlord needs in order to grant consent.

It is particularly important to review any reinstatement conditions which might mean that the premises need to be restored to the pre-alterations condition on termination of the lease.

Alienation clause

If the tenant intends to sublet all or part of the premises, make sure the lease allows this. The tenant will want to be able to assign the lease during the term if the tenant wants to sell their business.

Check what the lease says about any notice you need to give to the landlord and what information the landlord might need to grant consent.

The landlord will want to make sure that certain conditions are met and requirements are followed before the tenant can sublet or assign the lease.

Landlords and tenants should take legal advice

A final key element when negotiating a commercial lease is to take legal advice. This is an essential requirement. The lawyer will explain the technical conditions in the lease and their implications for the tenant. The landlord should also seek legal advice to ensure the lease is created in a form that follows the Heads of Terms and ensures any breach can be enforceable against the tenant and that any rent or other sums due under the lease can be quickly recovered.

To speak to a member of our team about a commercial lease, contact 01689 887887 or email laura.thompson@cwj.co.uk