Top tips for negotiating a commercial lease for tenants

TOP TIPS FOR NEGOTIATING A COMMERCIAL LEASE FOR TENANTS

The commercial lease can be a key asset of a business, and it is important to negotiate lease terms that are reflective of your business’ needs and risk profile. A key point to consider is that the landlord’s solicitor will usually draft the lease (in favour of the landlord of course). Therefore, it is your responsibility to fully understand the lease and to ask for modifications that offer a balance of fairness between the parties. The commercial property market is often influenced by the current market conditions and so both the landlord and tenant can use those conditions to leverage desirable terms within the lease.

Here are some top tips to consider for tenants negotiating their commercial lease:

1. Term of the lease

It is important that the term of the lease aligns with the needs of the business. A longer-term may be suitable for an established business or for a business that needs specific premises. A shorter lease may be preferable for a start-up business, or for businesses that don’t require a fixed space or require flexibility.

In either situation, a tenant will prefer that the lease is protected by the security of tenure rights under the Landlord and Tenant Act 1954, which gives the tenant a right to renew their lease on same terms (subject to some exceptions). A landlord may wish to exclude such rights in the lease, which would mean that  the tenant has to initiate negotiations for a lease renewal (if required)  once the existing term comes to an end.

2. Break Clauses

A break clause allows a party to terminate the lease early (i.e. on the “break date”). This gives one or both parties an early exit route if required.

Break clauses can work one-way (for example a tenant-only break clause) or mutually (which gives both the landlord and tenant the right to end the lease early).

Your solicitor should have a detailed understanding of the intricacies of negotiating break clauses and the pre-conditions that should (and shouldn’t) apply to successfully exercise the break clause.

3. Repairing Obligations

It is normal for a tenant to take on a responsibility to maintain and repair the whole or part of the property, and the lease will include the extent of this responsibility together with the standard of repair that is expected.

The repair obligation is an essential aspect of the lease because it will be used as the reference point for the tenant’s liability to maintain and repair the property both during and at the end of the lease when the property is handed back to the landlord. Tenants will generally budget for rents, business rates, utility and insurance costs but the repair obligation exposure can often be overlooked. In particular, this can result in significant financial liabilities at the end of the lease when the landlord consider the extent of any “dilapidations” at the property.

“Dilapidations” is often used to describe the process that a landlord will follow when assessing the property’s standard of disrepair at the end of a lease. The landlord will generally want to hold the tenant responsibility for any repairs needed that fall within the scope of the tenant’s repair obligation.

Therefore, it is important to ensure that the repair obligations is considered and negotiated appropriately at the outset so that the tenant is not left with potentially onerous and hefty repair liabilities.

A tenant may seek to prepare a Schedule of Condition (or instruct a surveyor to prepare one) that can record the state of the property at the beginning of the lease and will stipulate how the property should be handed back to the landlord at the end of it.

4. Rent Reviews

The amount of rent is crucially important for both landlord and tenants, especially in a post-pandemic era. Rent reviews are commonly included in leases – particularly where the term is longer – and tenant’s should be familiar with the rent review clause and should be looking to optimise their legal position at the lease negotiation stage.

It is important to know when the rent review dates are and to diarise these. Also, note that many leases contain rent review clauses that provide for an “upward-only” rent review. This means that the new rent payable on a rent review will be the market rent at that time or, if the market has gone down, the current rent. In other words, the rent payable under the lease can’t decrease even if the market rent levels decrease.

Tenants should consider whether their bargaining position will allow them to negotiate more flexible rent review provisions, including downward rent reviews and/or caps on rent levels.

5. Rights to transfer the lease or sublet

Many commercial leases will allow a tenant to transfer the lease to another business or to sub-let with the landlord’s consent. The landlord can impose conditions, setting out reasons why they may refuse consent, but these must be reasonable. Some of these conditions may include the new tenant being in a good financial position or for the outgoing tenant to guarantee the incoming tenant’s responsibilities.

For more information, please call us on 020 4571 8630 or email us at hello@birdilaw.com. Alternatively, please take a moment to complete our free enquiry form.

Disclaimer

Content on the Site is provided for your general information purposes only and to inform you about us and our products and news, features, services and other websites which may be of interest. It does not constitute technical, financial, or legal advice or any other type of advice and should not be relied on for any purposes. While we use reasonable efforts to include accurate and up-to-date information on the Site, we do not represent, warrant or promise (whether express or implied) that any information is or remains accurate, complete and up to date, or fit or suitable for any purpose. Any reliance you place on the information on the Site is at your own risk.