The process of taking a commercial lease can be overwhelming, especially for first time tenants. Some may be at a loss as to what they should be looking out for, both when the general content of the lease is being discussed with the agent and when the lease itself is being drafted.
There are many issues to be aware of depending on the individual circumstances, but here are some of the key elements which crop up time and time again:
What is it?
You should first ensure that you are being granted a lease, which you can check by seeing if you have exclusive possession of the property, rather than a less secure occupational arrangement.
The issue of rent may seem simple enough at first. However, be aware that what you pay at the start of the lease term may not be the same as five or ten years down the line. The landlord will want to ensure that they continue to see a good return on their investment and this means that often the rent will be reviewed as time passes. This can be at specified times (e.g. every third year), or when specified events occur. When the rent is reviewed, it could be to fixed sums which have already been agreed, or there may be a mechanism to calculate the increase, e.g. the rent will increase in line with an index such as the Consumer Prices Index, or be based on market value. In any event, you should budget for any possible increase.
Repair and Decoration Obligation
It is common for a tenant to have a full repair obligation, i.e. the tenant is responsible for the repair and condition of the property. If leasing part of a building or estate, you should ensure that the landlord is responsible for the structural condition of the property or any common areas shared with other occupiers. A wise tenant will also arrange for a schedule of condition to be prepared, whereby the state of the property is recorded at the time the lease is entered into, and the lease will provide that the tenant does not need to put the property in any better state of repair and condition than is shown in the schedule of condition.
Sometimes a tenant will be granted a break right, meaning they can terminate the lease early. This can be on specified dates, or a “rolling break”, e.g. the lease can be terminated at any point after, say, the third year. Whilst a benefit to a tenant, you should make sure that the requirements for the break to be effective are not too onerous. Also, watch out for landlord’s break rights. If the landlord has a right to terminate the lease at a certain point during the lease term, then your occupation may not be quite as secure as it first seems.
Rights of termination
Often the landlord will have the right to terminate (“forfeit”) the lease if the tenant breaches any of its obligations in the lease, or if the tenant does not pay any sum due under the lease within a certain time frame.
Your ability to deal with the lease
You should be wary of your rights to sublease, sell, mortgage or share possession of the property. Most tenants will want the option of doing these things, and usually the tenant will be permitted to do so subject to the landlord’s consent. A well-informed tenant will want to make sure that its ability to deal with the property is not overly restricted, and the conditions attached to any sublease, sale, etc. are not too strict.
A tenant should always be aware of, and budget for, other costs payable under the lease besides rent. For example: insurance rent, service charge, payment of business rates and utilities… and any other payments specific to the circumstances.
At mfg we have an experienced team when it comes to leases of all types, whether office, retail or warehouse space, or something more unusual, so please do get in touch if you would like to discuss possible pitfalls in more detail. Contact Phil Hunt by email on firstname.lastname@example.org