Negotiating a Commercial Lease – 5 Tips for a Tenant Negotiating a Lease:Pepperells
Negotiating a new Lease with a Landlord can be a daunting task for any Tenant, particularly those starting a new business or being granted a Lease for the first time. Prior to the involvement of an Estate Agent or Solicitor, Tenants can often make mistakes when negotiating a commercial Lease and miss the opportunity to negotiate the inclusion of desirable clauses. Please see below five key considerations that a Tenant should think about when entering into the negotiation stage with a Landlord:
1. Rent Free Period – In the current market, Landlords are eager to have a Tenant in occupation so there is a great deal of scope for Tenants to negotiate a rent free period. A rent free period at the start of a Lease can provide a new Tenant with the time they need to set up and complete any works before they are able to start trading. A rent free period of three months can be extremely useful, but all new Tenants should think carefully about the amount of time that they may need to properly settle into the property.
2. Break Clauses – The inclusion of a break clause can bring a welcomed peace of mind to a new Tenant, particularly one who is starting a new business. A right to end the Lease early will provide a Tenant with the flexibility that they need to be able to commit to a longer term with the understanding that they can break away from the Lease at an earlier stage if they run into trouble. Due to the current climate, it would be in the Tenant’s interest to negotiate a break clause which comes into effect on a yearly basis. If this is not agreeable by the Landlord, some Tenant’s may be happy with an opportunity to break half way through the term if they are not making the profits that they initially anticipated.
3. Repair Responsibility – A Landlord can often demand a full repairing Lease on a new Tenant, requiring the Tenant to keep both the internal and external of the property in good repair and condition. A Tenant negotiating their repair responsibility should seek to limit their responsibility to the internal demise only, with the Landlord being required to maintain and repair the external and structure. A Landlord has a vested interest in the building itself, and it is reasonable (in most cases) to expect the Landlord to maintain the external whilst the Tenant maintains the internal demise. If a Landlord is taking a firm stance on this point, the Tenant should think carefully about limiting their responsibility to the condition of the premises at the start of the Lease. A Schedule of Condition can be inserted into the Lease to make it clear that the Tenant will not be required to put the property into any better state of repair or condition than as evidenced by the Schedule of Condition.
4. Alterations and Permitted Works – Once a Lease has been granted, a Tenant may need to carry out certain works or alterations to the property to make the premises fit for use. Typically, a Tenant will only be able to carry out alterations to the property with the consent of the Landlord. It is therefore desirable to negotiate and obtain such consent prior to completion of the Lease. In doing so, the Tenant will ensure that they are able to carry out their desired alterations prior to entering into the Lease. Alternatively, a Tenant may want to negotiate the Landlord carrying out the works on their behalf prior to the commencement of the Lease to ensure that the premises is fit for use as soon as the Tenant is in occupation.
5. Landlord and Tenant Act 1954 – The Landlord and Tenant Act 1954 affords important protection to a Tenant when taking a Lease. If the Lease is not contracted out of the act, this means that on expiry of the term the Tenant will have the right to renew and the Landlord can only object to this and regain possession of the property on certain specified grounds.
The above are just some of the factors which a Tenant may want to consider when negotiating a Lease. Understandably, not all of the above will be relevant to each transaction and this should be assessed on a case by case basis. What is important is that a Tenant considers their position by reference to the above factors ensuring that fair negotiations take place between the parties.