Things to look out for when considering a Commercial Lease
Posted on 29th November 2019 at 16:42
Taking a new lease can be a daunting experience, especially if it is your first commercial property. To protect your financial and wider commercial interests, it is imperative that you negotiate a lease that works for you and your business.
Here are some of the things you should consider when entering a lease:
This guide highlights some of the common pitfalls in business property leases.
1. Rent Reviews
Rent reviews involve the periodic reassessment of the rent you will pay during the lease. The longer the term of lease that you undertake, the more likely it will be that you will have a rent review. Rent Reviews can be extremely complex and come in a variety of forms. Though upwards only open market rent reviews are the most common, the form of rent review is up for negotiation. The frequency of the rent review is also up for negotiation. NB make sure that you are not caught out with overly frequent rent reviews. If in doubt get solicitor’s advice.
2. Repair Obligation
The majority of new commercial leases are fully repairing and insuring (or FRI Leases) meaning that it is tenant’s responsibility to repair and pay for the insurance of the premises. Exactly what ‘repair’ means will depend on the wording of the Lease. Landlords will often seek to increase the level of responsibility on their Tenant, so it is important to be alert and aware during Lease negotiations. Repair clauses are one of the most commonly litigated aspects of Commercial Leases, so it is important to be aware of the degree of your responsibility at the outset.
3. Lease Term
It may be obvious, but it is essential that the term of the Lease fits in with your short term and long -term commercial objectives. Committing yourself to a long Lease when there is a long-term plan to relocate, downsize/upsize or purchase may not be in your best commercial interests. Planning ahead is essential, especially when there are restrictions on a party’s ability to break, assign or underlet the Lease.
4. Assignment and Underletting
One of the biggest mistakes new tenants make is thinking that they can assign (transfer/sell) their Lease as they please onto a new incoming Tenant. Firstly, leases can and, depending on the type of transaction, often do prohibit assignment. Secondly, even if you are able to transfer the Lease, you will usually continue to be responsible for the incoming tenant’s ability to comply with the terms of the lease. The right to underlet the premises can also be restricted. Tenants must ensure they are fully aware of their rights to assign and underlet before taking on the lease..
5. Break Clause
A similar mistake commonly made by tenants is assuming that they have a right to terminate the Lease when they want, without consequences. Such rights to break the Lease are common but not by any mean is a given. It is just as important to recognise that, even where a break right does exist, the Landlord may share the same right as the tenant to determine the lease. This creates uncertainty for the tenancy and, more crucially, a Tenant’s business.
It is imperative to identify any unnecessary risks and liabilities when taking on a new lease. The value of expert advice on the terms of a new lease cannot be measured, especially when compared with the added financial liability taken on over the course of your term.
Contact our team on 0113 2007480.
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