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Ten top tips for a start-up business when taking its first lease of commercial premises7th January 2020 Real Estate Commercial
Starting a new business can be a daunting prospect, with numerous issues to overcome in order to ensure the smooth transition from fledgling entity to a successful and profitable organisation.
Taking your first commercial premises can be an integral part of this process, and brings with it its own challenges and obstacles.
This blog provides ten top tips for taking your first commercial lease, examining some of the pitfalls to be avoided and strategies to do so.
1. Do your homework to make sure you find the right property tailored to the needs of your business
Obviously your main goal at the outset is to identify the property that is right for your business, giving regard to criteria such as location and square footage. We would always recommend instructing a reputable commercial property agent who will assist with finding you a property which fits your requirements.
2. Negotiate a comprehensive set of terms
Importantly once a property has been identified the agent will also assist with negotiating the terms of the proposed letting.
The negotiation of a set of “heads of terms” (a document prepared at the outset of a transaction outlining the terms agreed between the parties) is imperative and is the opportunity for you to negotiate the best deal available. It is important that any requirements you have are factored in at this point, as it will be much more difficult to negotiate additional concessions once terms have been finalised and lawyers instructed.
3. Consider which entity is to take the new lease
Clearly the entity which takes the new lease will be “on the hook” for all of the associated tenant liabilities, such as payment of rent, service charge and ancillary payments, any liabilities for dilapidations and such matters.
With this in mind consideration should be given as to whether to take the lease in a newly incorporated limited company rather than (in the case of a sole trader) in your own name, in order to avoid being held personally liable for such obligations.
4. Push for a rent free period/appropriate rent incentive
Dependent on the desirability of the property, levels of interest and current market trends, tenants are often able to negotiate a rent free period or associated rent incentive (e.g. a period where they will pay a “half rent”) in lieu of the fact that they may need to fit out the property. Your instructed agent will be able to advise as to the likelihood of negotiating such an incentive, however it is certainly worth asking the question, as clearly where possible you want to avoid paying rent when you are still fitting the unit out.
5. Build in as much flexibility as possible as to the term of the lease and your ability to terminate and to “deal”
As a start-up entity you have no way of knowing in which direction your new business will go. You may find that the business grows rapidly and that you quickly require bigger premises to support such growth. Conversely you may find that things do not go so well, and that you no longer require as much space or wish to terminate the letting in its entirety. As such it is important to retain as much flexibility as possible.
It is advisable to try and negotiate a tenant only break right at a specific point (for example, after 3 years of a 5 year lease term) or better still, a rolling break right giving you the ability to terminate at any time after a given date.
Furthermore it is important to consider how you are permitted to “deal” with the lease. If the property is potentially divisible, it is certainly advisable to try and negotiate the ability to sublet part to a third party tenant, which would then enable you to “hive off” part of the unit and recover some of your liabilities in relation to it.
6. Consider your repairing liabilities and protect against overly onerous obligations
You need to be sure that you are not signing up to lease with an overly onerous repairing liability.
To protect against this, it is important, where a property is not in full repair, that you always seek to agree a schedule of condition to be attached to the lease. This evidences the state of repair of the property at the date you take your lease, with an associated lease clause which provides that you are only obliged to put the property back into the state of repair as evidenced by the schedule.
7. Consider what you need to do to the property, and bear in mind reinstatement!
Typically commercial leases allow tenants to make internal non-structural alterations with landlord’s consent, and often allow the erection of internal partitioning without the need to obtain consent at all. It is important to ensure that where fit out works are required in order to operate from the premises, landlord’s consent is obtained as part of the initial transaction, and that you do not end up picking up the tab for the landlord’s legal costs in preparing a licence to document such consent.
Always bear in mind that landlords will in likelihood require you to reinstate the premises at lease expiry. This is particularly important to bear in mind where works are significant, as such removal will be at your cost.
8. Where possible agree a cap on additional charges
If, for example, you are taking a lease of a multi-let building, there will likely be common areas and you will in all likelihood be required to contribute toward the cost of maintenance/insurance of the same. Where possible it is advisable to try and cap such contributions at a fixed figure, so that you know your liability cannot go above that figure. As a start-up business it is imperative to keep a strict control over your costs and clearly you want to avoid any unexpectedly high liabilities.
9. Be aware of SDLT and additional post completion costs
Dependent on the length of term and annual rent you agree for the property, it is possible that the lease will generate a stamp duty land tax liability. In addition if your lease is over 7 years in length it will require registration at the Land Registry, for which there is a registration fee payable. As such it is important that you take advice as to such liabilities in order that you can factor them in when working out your costings.
10. Take professional advice!
The above points provide a broad flavour of the sort of issues which need to be considered when negotiating and taking a commercial lease. We would always recommend that you instruct a competitive and reputable commercial solicitor who will ensure that these points (and more) are picked up during the negotiation process and that your interests are properly protected.
In the event that you require advice on your first letting or on any other real estate commercial issue, please do not hesitate to contact the team.