Many start-up businesses quickly realise that the shared offices they are in are too small and the time comes to take their first leased premises. So, Tony Houghton of Keystone Law shares his top tips, for going it alone for the first time.
1) Time to become limited if you’re a sole trader
If you’re a sole trader it is tempting to take out the lease in your name. However it is preferable to establish a limited company to take out the lease.
2) Be prepared to pay 6 months in advance and plan for rent increases
Deposits often carry an element to cover VAT in the event of tenant default. It may not be possible to claim back VAT immediately because often landlords will only issue a VAT invoice in the event of rent arrears. Generally with 10 year leases, the landlord will want to have a rent review provision in the fifth year on an upward only basis. This review would take into account open market values and provide a default arbitration provision in the event of dispute.
3) What to do if the building needs some TLC?
If the premises needs some work to bring it up to scratch, you may be able to negotiate a rent free period. You should also take care with ensuring that the details of your lease do not leave you liable to return the premises (and also any services) to the landlords in a better state of repair and condition than existed at the date of the lease, which can be manifestly unfair. It is always wise to check out the heating, electrical and other services at the property and to limit the tenant’s obligations by reference to a photographic schedule of condition at the very least. A ‘Full Repairing and Insuring (FRI)’ lease should only be taken as a last resort and be aware if it features the words ‘renew’ and ‘replacement’.
4) Making changes to the layout
Usually landlords are pretty relaxed about tenants carrying out non-structural internal alteration like erecting partitioning, but it is always worth remembering that the landlord will want the premises reinstated at the end of the term. This is particularly important where structural alterations are to be carried out – the cost of reinstatement will be your responsibility and, if not completed by the end of the term, can lead to a dilapidations claim by the landlord.
5) Too much space? Subletting could be the answer until you need it
Where the tenant wants to share occupation with subsidiary or associated companies landlords usually do not have a problem, but do tend to get uptight if occupation is shared with third parties; particularly where they have not been asked for specific consent so always make sure you keep the landlord informed.
6) Make sure you cap additional charges if you are going into a multi-let building
If you’re leasing a space in a multi-let building where the landlord maintains the main structure of the building you should agree an annual service charge cap to cover services, insurance premiums and any other shared expenses.
7) Think about how long will you want to be there
Negotiate the term of your lease so that there are tenant only (not mutual) termination breaks at regular intervals just in case the business grows and you wish to move to larger premises.
8) Have an exit plan
In the event that you wish to terminate the lease it is vital to ensure you have notice periods agreed so that you are do not have any penalties to pay and that you only have to pay up until the end of your notice, providing you vacate the premises. As with many short-term leases, the landlord may insist that the lease would be ‘outside the act’ i.e. there would be no automatic right of renewal at the end of a 10 year term.
9) Do not pay the landlords legal costs
Even in comparatively short-term leases at a low rent, the trend is for leases to be verbose – running to as many as 70 pages. As the tenant you should resist any attempt by the letting agents to pay the landlord’s legal costs or at least to limit the amount of contribution towards them to a specific figure.
10) Get your contract reviewed by a solicitor
Before finally agreeing to any lease transaction it is worth referring any heads of terms to a solicitor to check – that way any onerous provisions can be deleted at an early stage, which is much easier than when the lease has been issued.