Business owners will reach many milestones during the lifetime of their business, from hiring their first staff members to filing their first accounts. Another significant milestone for many is when they take on their first commercial property lease. Whether that is a new office, a retail outlet or a warehouse space, it is usually a time for celebration as it signals growth.
So well done, you’ve found the space and now it’s time to secure it.
Before you enter any property lease, remember that the devil is always in the detail. Don’t expect landlords or their agents to be especially forthcoming about various clauses that could leave you out of pocket later on.
Before you commit, make sure you know what you’re signing up to. Having been a commercial property lawyer for almost 20 years, there are a number of avoidable issues that hit business owners time and time again. Here’s some important pointers to consider:
Schedule of Conditions
When you are discussing the terms of the lease, ensure that the landlord agrees to a Schedule of Condition. The Schedule is a separate document which details the property’s condition at the time you take on the lease.
This is important because when the time comes to hand back the property, the landlord is entitled to have the property returned to it in good and substantial repair and condition. Which can often be better than the condition that you have taken the premises.
To mitigate this, a good solicitor will ensure that your Schedule is attached to your lease and that it is referred to in the repair and decoration covenants, so that it is clear you are not on the hook to have the property returned in a better state.
Unfortunately, you must bear the cost of having the Schedule prepared – which can either be done professionally by a surveyor, or you can do it yourself. Alternatively, you may know a builder who could assist you with the inspection and preparation of the Schedule. This is one area I always advise clients not to cut corners on.
If you do decide to do it yourself, ensure that the report includes a detailed description and photos. This will help when you do hand the property back at the end of the lease.
Negotiate a Break Clause
Standard leases tend to be around five years, but that can be a long time in business.
Your own business projections are one thing, but you have no way of knowing what the future business landscape might bring and how that will impact your business. That is why it is important to include a break clause in the first two or three years.
Some business owners mistakenly think that if their business ceases to exist, then so too do their liabilities. This is not true. You may choose to close a business after three years, but if you’re locked into a five-year lease then regardless of whether your business is open or not, you will still need to pay the landlord for the term of the lease. This is why a break clause is such a good idea, particularly if it is your first venture. It gives you the option to change your mind at the break point should things not be going to plan.
Avoid Personal Liability
Landlords will often want you to take the lease in your name or provide a personal guarantee. This means that if your business is unable to meet its payments under the terms of the lease, then you are personally liable to make the payments. Again, this applies even if your business is no longer trading.
One alternative to this could be to offer to pay a rent deposit, or to pay a higher rent deposit than the landlord has asked for. Some landlords will want both a personal guarantee and rent deposit, but where possible try negotiating a higher rent deposit in lieu of a personal guarantee. Admittedly, this will be a bigger outlay at the outset, but does offer you greater personal protection should your business not succeed.
If the landlord won’t agree, you could request a release from the personal guarantee after two years when you’ve shown yourself as a good tenant. If the landlord agrees to this release, it must be specified in the lease before completion.
Ensure a Fair Market Rent
Like you, landlords are commercially minded and want to maximise their return. When it comes to charging for leasing the property, it is expected that they will charge a fair market rent.
A fair market rent is the amount of rent a property is likely to command in a particular area. However, what can mean a fair market rent to one landlord can be vastly different to another.
Before you agree to the rent, do your homework. Speak to other agents and get their view about what is reasonable. If your landlord has other similar properties, ask to speak to other tenants about what they pay.
Ask About Other Charges
Always ask to see the service charge accounts for the last three years before you agree your rent and sign the lease.
You may want to try and negotiate a capped amount for the service charge you will be required to pay for the first few years of the lease and have that inserted in the lease. The last thing you need as you build your own business, is to have to pay the landlord an additional unexpected sum to cover any additional service costs for buildings works.
Expanding your business should be a time of celebration but do ensure you don’t enter into any lease without first doing your homework.