Shopping for a new commercial lease (part 2)
So hopefully we haven’t put you off the idea of taking a commercial lease or licence over commercial premises, and you’re eager for more advice about the things you should be thinking about and deciding on before you go shopping.
Are you likely to want to sublet or share your new premises?
Sometimes clients look for premises that are bigger than they need. The aim, of course, being subletting in the short term, and then when their business grows, end the sublet, and move into the extra space.
This can often be a much more cost-effective idea than either moving as you grow, or having wasted empty space. Especially if you don’t know for certain how long it will take you to get to the size you want. However, some premises will have a complete ban on subletting part of the premises.
So, if this is going to be a requirement, make sure you tell the agent at the outset.
Signage and banners
Depending on what kind of business you are in, you might be very dependant on passing trade and people finding you easily.
This may mean that you need to have a clearly visible sign showing your business, such as in the window or over the door.
Make sure that the lease allows you to put your signage up and that there aren’t going to be any restriction on what you can say or where you can say it. This is particularly important with new developments, where you won’t be able to see what other tenants or the current incumbent has been allowed to do.
Opening hours and access –
These days we are a 24/7 world, and even if you are not “open for business” around the clock, it’s not uncommon for people to want to be able to access their premises at all times of the day and night.
Sometimes catching up on a Saturday morning is the only way to keep your head above water.
Mostly landlords appreciate this, but sometimes there can be fixed (non-negotiable) restrictions, particularly if you are in a complex such as a shopping centre. So look out for whether are any times when you cannot gain access or any times when you must be open for business. This might also affect things like deliveries to the premises or having works done.
Change of use –
If your agent shows you premises that are being used for something that is very different from what you do, remember to ask what the designated usage is, and check whether that covers your line of business or whether an application to the Council for a change of use is going to be necessary.
Be sure to investigate this carefully, as it’s not always as obvious as it looks.
For example, if the premises were previously used for a snack bar, which sold food and drink for customers to take away, and you are going to change it to a proper sit down restaurant, you might think that because you are still in the food industry, it will be the same class of use, but actually it might not be and you may need permission both from the landlord and the council to apply for a change of use.
The common planning use classes can be found here.
What’s it going to cost me, and when –
All leases are different, but a good agent will have an approximate idea of what the main terms are going to be for any premises they show you.
In most leases, rent is payable on a quarterly basis in advance. If you only pay one month’s rent, when you should pay three under the lease, the landlord will have the right to throw you out without going to court, so if cash flow is likely to be an issue, try to negotiate for monthly rather than quarterly rent.
Not only should they be able to tell you what the rent is going to be, but they should also be able to talk about what concessions might be available.
Let’s look at an example of how you could strike a better deal –
If the premises have been empty for a while and they are keen to get someone in;
- it might be worth asking if the landlord would agree to a rent-free period to sweeten the deal.
- This will be more attractive to them than a reduction in the rent, as rent reductions can have an effect on the landlord in rent reviews if they own other properties in the area.
A reduction in your rent could make it harder for them to get a rent increase in a neighbouring property that they own.
In addition, be prepared for the agent to ask about your ability to pay the rent. This might include wanting to see your accounts or perhaps obtain information from your accountant.
If there are concerns about your viability, particularly if you are a new business with no trading history, you may be asked to pay a rent deposit (such as three months rent) which will be held by the landlord until the end of the lease. The landlord can then use it if you either don’t pay your rent or leave without putting the property back in good condition.
If you are a limited company, they may also ask for personal guarantees from directors. Make sure you take legal advice on personal guarantees before you sign them.
How long (the term of the lease)?
Everything is open to negotiation, but you should consider how long you are likely to want the premises for and go shopping with that time frame in mind.
- A licence is usually around 12 months.
- Leases tend to be around 3-5 years.
It is also worth mentioning if your lease is protected by the Landlord and Tenant Act 1954, you can insist on a new lease at the end of the old lease, and there are only very limited circumstances in which your landlord can refuse.
Break clauses and termination rights –
If you are very uncertain about what the future holds, you can ask if the landlord would agree to a break clause in the lease, which would give you the right to terminate the lease at certain times and on certain terms, provided you were up to date with your rent.
Having a termination provision will often mean an increase in the rent as the quid pro quo, but this could still end up being cheaper than having premises that you no longer need because you’ve committed to longer than you wanted, but not long enough to be able to get another tenant to take over from you.
If, however, you do negotiate a break clause, pay close attention to the timing of serving any notice to exercise that break. There is no harm in serving a notice early, but if you serve it even one day late, you can lose the right to terminate and be stuck with the lease for the rest of the term.
In conclusion –
Whilst there is no end to the issues that could arise when you’re looking for commercial premises, this, in our experience covers the most likely points you’ll need to be aware of. We’re always happy to chat through options and costs if you need more information or guidance.
Our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.