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Advice on Commercial Leases - Negotiating Commercial Lease Terms

You’ve trawled through God knows how many pages on Rightmove and visited upteen properties. Now, you’re sure you’ve found THE property to rent that’s perfect for your business and at the right price. What do you do next?

Before telling the agent/landlord that you are interested draw up your own heads of terms. Agents tend to produce long lists of terms (called ‘Heads of Terms’) that you never agreed. You will find it difficult to make any changes to those terms later on.

Apart from the rent, there are quite a few other things to think about, so that when you do talk that agent it’s YOU who’s dictating the terms. Here is a list of the most common pressing issues to agree with the agent right from the start:

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  • Who's the Tenant?
  • Guarantors
  • Rent Payment
  • Rent Free Period
  • Tenant's Break Clause
  • Landlord's Break Clause
  • Repairs
  • Costs
  • Service Charge
Consider having a limited company or partnership as the tenant. At least that way, you know that if it all goes wrong you should only stand to lose the assets of the company and not your house, car etc. Setting up a company is really easy. The problem is the Landlord may well not be happy with having a start up company with no assets as tenant. He may therefore insist that you provide a guarantee.
Avoid giving any guarantees if at all possible. If you wanted a limited company as tenant then giving a guarantee will defeat your attempts to limit the liability under the lease to the company’s assets. If need be, try to fob the landlord off by offering a rent deposit instead. It often works and it’s well worth it as you will be able to sleep at night knowing that there’s a limit as to how much you could go down for if things go belly up.
Normally commercial leases require tenants to pay the rent quarterly in advance, which isn’t always great for cash flow. Agreeing monthly payments might make life easier for you.
Always try to negotiate as big a rent free period as you can get away with. A typical rent free period might range from 3 to 12 months in length. A good way to negotiate a rent free period is to argue that the rent free period is to reflect your fit out and move in costs and/or simply the costs of getting your business started. It can be really handy in those early days of setting up shop when little money’s coming in. If you can’t agree a rent free period then you might be able to agree a reduced rent period (for example, paying half the rent for the first year and thereafter the full rent).
Always try to negotiate a break clause in the lease. It might be especially useful to have a right to break relatively early on like at the third anniversary of the lease, so that if the business really isn’t working out, at least you can get out of the lease with minimum fuss.
Never let the Landlord have a right to break.
Try to get the landlord to agree to repair the structural and external parts of the building. Be careful that the Landlord does not have the right to sneakily charge you the cost of those repairs via a service charge (see below). Ideally, you should only be liable to repair the internal non-structural parts only of what’s let to you. Regardless of what parts of the building you do have to repair, always insist that you do not have to put the Property into any better repair than at the start of the lease. Make sure that the landlord agrees to record the state of repair at the start of the lease in a ‘schedule of condition’ (ie basically a collection of photos and a written description of the condition of the Property).
Resist any suggestion that you should pay the Landlord’s legal or other costs.
If there’s a service charge payable always try to negotiate a maximum amount that the landlord can charge you in any one year of the lease term (usually called a ‘cap’). This is extremely important. You are not an open cheque book. You could also try to agree that the service charge is not to cover the expense of repairing and replacing buildings, roads and plant/equipment.

Of course the landlord can refuse any or all of the above even if it appears completely unreasonable to do so. Fine. At least, then it’s your decision whether to take on those costs and/or the risks, or move on to greener pastures.

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Commercial Property Team:

Commercial Property Solicitor
Contact James Edwards for a free no obligation quotation today by phone or via our contact form. James is a commercial property solicitor advising landlords and tenants on commercial leases.

James also has experience in buying and selling commercial property. He is friendly and very approachable. James works with Christopher Bartlett, who is an experienced commercial property solicitor working on large development projects.


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