Nine important factors to remember when leasing business premises

13 August 2014 | Gemma James

Gemma James, partner at law firm MundaysYour premises is vital to your business, and planning ahead can save you time, stress and money in the future. Here are some points to help you maximise the rewards you can reap from your property arrangements.

Do you need a freehold or a leasehold property? A freehold is a major capital investment to fund from the outset and commits you to a specific location, but it becomes yours to deal with as you wish. A lease would be for an agreed period of time only, so is useful if you may need flexibility to move on in case your supply contracts change, but it places you somewhat at the will of the landlord and liable to pay rent and possibly service charges. A licence or a tenancy at will is even more flexible, but may involve sharing occupation, would not be transferable and is usually a very short term arrangement. 

If you choose a lease, you should consider:

• The landlord may ask you for a rent deposit as security, so either ensure you have funds available or be prepared to offer a compromise on the lease terms, such as offering guarantors.

• You will need the landlord’s consent to make alterations (including expanding the space available to you for example by adding a mezzanine floor), and you may well have to remove all such works at the end of the lease. If the works are vital, it is best to agree them with the landlord from the start to save the risk of the landlord refusing consent in the future.

• If you have an option to renew or a break clause, make careful note of deadlines for serving notice to exercise them and seek legal advice well in advance to ensure that you do not lose the right.

• Try to limit your liabilities, for example not being required to repair the premises to a standard beyond that shown in a photographic schedule of condition. Check if the landlord is planning works to the building or estate which may increase your service charges, and ideally try to cap the annual service charge for which you will be liable.

• Make financial provisions and arrangements with contractors well in advance of the end of the term so dilapidations obligations will not come as a shock.

• When negotiating lease terms, remember any clauses that benefit you as tenant can also count against you at rent reviews because a more tenant-friendly lease could be valued as ‘deserving’ a higher rent.

• Do you need specific ability to share occupation of your premises with your group companies or with customers? A specific clause permitting this will be necessary.

• Think about an exit strategy. Do you need a break clause or the ability to assign or sub-let all or part of the premises? You will probably have to obtain the landlord’s consent to do so at the time and will have to pay its costs. The landlord will want to impose conditions such as you effectively being the guarantor for the new occupant, so before entering the lease, consider the conditions you would be prepared to offer.

• If moving premises, consider entering an 'agreement to surrender' with your current landlord and an 'agreement to lease' with your new landlord. If you exchange both agreements at the same time, you will have the contractual certainty of a completion date for the end of your old lease and for the start of your new lease.

Most importantly of all, seek advice from a lawyer and surveyor at the outset. A little forward planning can save you from long-term disaster.

☛ Gemma James is a partner at law firm Mundays.

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