Shopping For New Leasehold Premises And Commercial Lease (part 1)
If you are in the market for a new shop or office, rather than a new woolly jumper or yet another pair of socks, there are lots of things we would suggest you think about before you make any final decisions. Taking on a commercial lease comes with a lot of challenges and possible pitfalls which should be mitigated where possible.
So here is the first half of our list of issues to think about before you start talking to agents.
Commercial Lease of License?
Firstly, and we would say most importantly, you should decide whether you want a commercial lease or a licence.
This is definitely something to decide on from the outset, so that you can tell the agent what your preference is. They won’t be able to advise you on the difference from a legal perspective, so here is what you need to know.
In very brief terms, a lease is more permanent and will give you more security, but it can often be more expensive in the long run.
For example, with a lease that is protected by the Landlord and Tenant Act 1954, your landlord will almost always have to grant you a new lease when the existing lease expires, so you have protection, but you don’t have to take the new lease if you don’t want to, so it’s very much stacked in your favour.
However, at the end of a licence, your landlord is under no obligation to let you stay, no matter how good an occupier you’ve been or how much damage will be done to your business if you have to move.
Lets look at an example –
Please also note the following differences between a commercial lease and a license –
- With a lease, the rent is agreed in advance and fixed, and there is a pre-set process for increasing the rent which must be followed for any increase to be binding on you.
- With a licence, the landlord can only increase the rent at times provided for in the licence, but they can increase it to any amount they want, and if you don’t agree, and you cannot negotiate a figure that you are happy with, your only option is to leave.
- At the end of a licence, your obligations to put the property back in the condition it was in when you moved in is quite limited, whereas with a lease it can be very stringent and extremely expensive. One of the advantages of a licence is that all the obligations to keep the premises in good condition are the responsibility of the landlord.
- With a lease, whilst the landlord will do any repairs that are necessary, he can claim it back from you through the service charge.
As a rough rule of thumb, licences are better if you don’t plan to stay too long (perhaps if you are just getting started and not sure what the future holds or how fast you are going to grow) whereas leases are better for more established businesses that need stability and certainty.
Do you want or expect to do work or make alterations to the property?
Depending on what type of business you are in, you may need to think about not just the cost of those renovations or alterations but what permissions you need and from whom.
If you are a routine office based business, such as a firm of accountants, you may feel that all you need is desks and chairs, and so there isn’t much too it.
Nevertheless, we’d still recommend that you check out all of the facilities, such as the strength of the available internet, and the effectiveness of any existing heating and air conditioning and make sure they are sufficient for your purposes.
- If you need anything repaired or upgraded, it’s much easier to do it as part of the negotiations and we can make sure that it’s a condition of the let that they are done properly.
- However, if you are a more visual or bespoke business, you may want to personalise the premises. For example, a hairdressers or restaurant may want to carry out extensive works.
If so, there are a few things to consider –
- Firstly, you will almost certainly need landlord’s consent.
- What’s more, if your landlord has a landlord, you’ll need their consent too. That might sound a bit strange, so allow us to elaborate.
More examples –
Lets look at an example. Imagine a high street, with a row of buildings. Shops on the ground floor, offices on the first floor, flats on the top floors.
- It’s quite common for the whole block of buildings to be owned by one person or company. They would be called the superior landlord.
- They will then grant a lease over each individual building to individual tenants. Each tenant of a whole building would be called the landlord.
- The Landlord then grants leases over each shop, each office and each flat. Each person or company taking a lease over each shop, office or flat will be called the tenant.
- If a tenant sublets, then the person taking the sublet is called a sub tenant.
In some situations, it can become even more complicated, when there are multiple sublets so that there are more and more parties involved, but it’s more common to just have a superior landlord, a landlord and a tenant.
If you are the tenant, and you want to carry out alterations to the property, you will need the consent of your landlord, who in turn will need the consent of the superior landlord.
What is a License to Alter?
Consent has to be confirmed in a document called a Licence to Alter. So long as what you want to do is fair and reasonable, no one is likely to object, but every party will want their solicitors to approve the Licence to Alter, and it’s fairly common for the incoming tenant (ie you as the party that wants to do the works) to have to pay everyone else’s legal costs.
Everything is open to negotiation, and much may depend on how desperate the landlord is to have you take over the property but if you are on a tight budget, it’s best to ask the agent at the outset how many parties there are above the landlord so you have a rough guide as to how many sets of legal fees you might have to pay. It can also have a knock on effect on timescales.
The more parties need to give their consent, the longer it will take. It’s also a good idea to make sure all the consents you need are agreed BEFORE you sign the lease. Once you’ve committed yourself to taking the premises there is less incentive on the parties to co operate with you.
That might make you think that once you’ve signed up, you can’t have works done later on through the lease. This isn’t the case. You can ask for permission to do work at any time, but it might take a bit longer and could be harder to negotiate.
Hopefully this hasn’t put you off buying commercial premises, in which case please carry on reading our next article for the rest of the list of things you should consider before you go lease shopping!
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.