7 points to consider when taking on leased business premises

24th February 2011
Property costs are a significant overhead for the majority of businesses including rent, service charge, rates and repairs. It is therefore vital that businesses get the right premises for their purpose on the right terms. The following are some of the main points to consider when taking on leased business premises:
What is the term of the Lease?
It has become common for short (3 / 5 year) leases to be offered to tenants as these provide greater flexibility for both parties and potentially a lesser financial burden for the tenant. If a landlord is only able to offer a longer lease, it may be possible to negotiate a break clause perhaps on the 3rd or 5th anniversary of the beginning of the lease.
Do you require a break clause?
If so, it is important that this does not contain any hidden traps. It is usual for any break to be conditional on all rents being paid up to the break date. However it should not be conditional on full performance of the tenant’s obligations under the lease. It is advisable for the break date to be at the same time as any rent review so the tenant has the option to break the lease if the rent is increased dramatically.
Will there be a rent review?
It is usual for the rent to be reviewed if the term is more than 3 years. Usually the rent is reviewed to open market rent and it is common for this to be reviewed every 3 or 5 years. A rent review is historically upwards only but recently it has been possible to negotiate an upwards and downwards rent review.
Who will be responsible for repairs?
It is usual for the tenant to be responsible for repairs of the property. This can be costly so it is always advisable to limit your liability by instructing a surveyor to prepare a Schedule of Condition. This document evidences the state and condition of the property at the beginning of the lease. This may seem like an expensive outlay when costs are already high but it could save money in the long run as it may prevent a potentially extortionate dilapidations claim at the end of the lease.
Is there a service charge?
It is usual, particularly with properties that have common areas (e.g. communal toilets, lifts and stairwells) for a service charge to be payable. It is important to ensure you are only paying your proportion, which is usually based on your square footage. It may be possible to cap your service charge contribution.
We always check with the landlord’s solicitor whether there is any major expenditure planned in the near future as this will obviously increase the service charge.
Who will insure the property?
The landlord will usually insure the property and the tenant will reimburse the landlord for the cost of doing so.
Is a rent free period being offered?
This is common if the tenant needs to fit-out the property but this is often now offered as an incentive.
These are just some of the points to consider when taking on leased business premises. For more information please contact Laura Raby.
Laura Raby,
Commercial Property Solicitor