Business leases – MOT before you start the journey
Take the time and trouble to check the terms of the lease before they enter into a relationship with a landlord which may last years.
If you have taken the car away this summer then you are likely to have gone through a checklist of preparations before you go to check the oil; tyre pressures and the like. The more preparations you make, the fewer things can go wrong.
Few businesses however, take the time and trouble to check the terms of the lease before they enter into a relationship with a landlord which may last years. They see the premises they like and jump in with both feet, only to discover nasty surprises several years down the line. Below are a few things to think about before you embark on such a long journey in new premises:
- Do the premises fit? I know this is an obvious question but do they really fit? Are they in the correct location? Will they be in the correct location in 3, 6 or 9 years’ time? Is there raised flooring (to put cabling underneath to connect to computers wherever you want them)? Is there air conditioning? Is there natural light? Is parking an important consideration? If there is planned growth, will the premises be big enough in three years time, let alone at the end of the lease?
- Is there a rent free period? Particularly at the moment, there is tendency to negotiate rent free periods to allow the tenant to fit the premises out.
- Is there a “licence” for alterations? You may have found the perfect premises but they may need alteration. Would the landlord agree and what conditions would be imposed on them being carried out? Would the landlord require the alterations to be removed at the end of the lease? Given the climate, could a deal be reached with the landlord on covering the costs on improvements to the building?
- What is the rent and how are the rent reviews calculated? There are two principal rent review formulas – one is in line with inflation and the other is in line with changes in the market rent. At the moment, one may be more advantageous than the other.
- Is there a service charge? If so, would this include the managing agent’s fees? What are the expected costs? Is there a budget for the next few years?
- Have you included GST in your rental calculations? The landlord may be registered for GST and it may be added to your rent. It would, of course, be offset against any GST you collected (it is a through put tax) but only if your business is registered. If it is not, then this may be a consideration.
- What are the repairing obligations? Is it a fully repairing lease? If it is, then you are responsible for the interior and exterior maintenance. You should only accept the responsibility if you have had a proper survey to know what you are letting yourself in for. If it is an interior repairing lease then you may still be asked to indirectly contribute to the maintenance costs of the exterior through the maintenance charge.
- Is there a lift and do you have repairing and replacement obligations? Depending on their age, lifts can be expensive and problematic. Beware of accepting responsibility for a lift.
- What is the permitted use? If the building had previously been used for a different purpose then your proposed use then a planning permission may be required before your new business is authorised. An application may take time to process.
- Is there a requirement for a guarantee? Landlords always prefer the security of guarantees just in case things go wrong with the tenant. There are alternatives. The landlord may prefer a rent deposit rather than the right to enforce against you and your assets.
- Will there be the right to assign or to sub-let? If you decide to move out during the course of the lease then do you have the right to assign the remaining period. If the business contracts, would you have the right to sub-let part of the property to another business.
- Option to break? You may not enter the relationship with the expectation that it might fail but you could build a safeguard into the agreement just in case. If you have a break clause during the term of the lease, it would mean that you could escape the burden of the lease earlier.
There are other points to think about before committing to a commercial lease but the above is food for thought.