Business Property Leases
Business Property Leases
Business Property Leases
This article provides free advice and information to landlords and to tenants about business property leases. It is applicable to all commercial property leases. Since it is invariably the landlord who submits the lease to his prospective tenant, the help notes supplied with each document are provided largely from the perspective of a landlord. However, that does not apply to the information set out in this page, much of which is directed to the interest of a tenant.
Note: the words "lease" and "tenancy agreement" are interchangeable.
I know all this. Just take me to where I can choose a document to buy.
Contents:
Planning issues
Excluding security of tenure
Issues for landlords
Tenants - lease or buy
Tenants - tips for negotiating a business property lease
Landlords - tips for negotiating the business lease terms
Terms in your lease
Planning issues
Planning use
As well as checking with the local authority that his proposed use is lawful, the tenant should make sure that the landlord knows exactly for what he intends to use the building, and that it is approved. It is important that a tenant considers his future requirements here. It is very easy to change the direction of a business and find you fall foul of your lease. For example, a manufacturer may not at first consider that he might want a cash and carry or factory shop division a few years later. Alternatively, a tenant may want to dispose of the lease to someone who wants to use the building for a different purpose.
The question of user is of course more important in longer leases where the use is much more likely to change over time. Solicitors for landlords who do not have much property valuation knowledge, frequently fix the use clause narrowly - perhaps with the thought that if the tenant needs to change the use in any way he will have to come back to the landlord, and perhaps pay a fee or more rent for the privilege.
He misses the point however that at a rent review the new rent will be calculated by reference to the rack rent (then current rent) payable in the open market. Clearly, a theoretical open market value would be lower if the number of potential tenants is fewer. A landlord should therefore think particularly carefully before imposing a use restriction which limits a change to a use which in fact provides a lower rental value than some other potential use. Generally speaking, the wider the use allowed, the greater the rental value.
Excluding security of tenure
If the lease is governed by theLandlord and Tenant Act 1954, and most leases are, the tenant has a right to security of tenure. This simply means that they have a right to continue using the property and renew the tenancy on the same terms so long as neither of the parties objects.
Under the new Regulatory Reform Order 2003, a landlord can only refuse to continue the tenancy if the tenant has done one of a few things (see our article on Security of Tenure for full details). One example might be that the tenant failed to make regular payments.
If the landlord is happy for the tenant to continue in occupation under the terms of the original
Lease, he should serve a section 25 notice to that effect.
Issues for landlords
Prescribed Lease Clauses
On a lease over seven years, it is now mandatory that you make sure that it contains prescribed lease clauses at the top of the agreement. All Net Lawman documents provide for this and explain how to complete the clauses. The PLCs have been designed to speed up the registration process at the Land Registry office. For more information, please read our articles on Prescribed Lease clauses (part one) (part two).
Tenants - lease or buy
When your business requires it's own premises a decision must be made as to whether to lease or purchase commercial property. If the answer is not immediately obvious to you, here are some of the considerations:
In a commercial property lease the risk is taken by your landlord. The rent is likely to be fixed for a number of years, and will then be increased in line with the general level of rents for similar properties.
Tenants - tips for negotiating a business property lease
After salaries, the cost of your business lease is likely to be the biggest overhead you have. Because a business lease invariably involves a commitment for a substantial period of time, it is very, very important to get the right premises on the right terms. Here are a few tips:
Write down absolutely all the features you need in your new premises. Put them in order of importance. Check every property you visit against your list, and make sure you account for any additional cost or disadvantage which each may present;
Short leases are often called tenancy agreements, but there is no difference in law. You can fix your deal for any period you like. If your landlord likes the thought of your becoming a tenant he will ask for a long term. If you do not wish to be tied then you will negotiate a short term. Start with the deal that you would like, not the one that is presented to you;
Business property tenants have less statutory protection than residential tenants. (But see below). Most commercial landlords are either professional landlords or use professional agents, or both. They are experts in every aspect of commercial property. You may not be. Most commercial agents are also experts at negotiating lease terms on behalf of their clients. Again, you may not be;
The main effect of the comparatively free market in commercial property is that "everything is up for grabs". If the agent or landlord thinks you are likely to take the property on offer it is unlikely that they will move on the terms. If you make it clear that you have several alternatives, then you will find that the previously "fixed" terms suddenly become very flexible. Much depends too upon the state of the market. A landlord may well be tempted to hold out for his set price and terms if he thinks someone else will come along soon and accept them;
If the market in the sort of property you want is poor at the time you are searching, then you should make sure that there is some sort of a ceiling on the new rent when it is reviewed. You do not want to find you are paying three times as much in three years time;
Business property leases for longer than three years generally incorporate a provision for the rent to be "reviewed" every three, four, or five years. The review is usually "upwards only". Infrequent reviews obviously lead to your total payment being less over the term of the lease;
Commercial agents will usually entice you into a deal by setting out only half of the terms which are important to you. Once you have agreed on that basis your solicitor will receive a draft lease document, which gives all of the bad news. By now you are psychologically and practically committed to the property, and you may find your solicitor's concern to be an irritation. Because you think the deal has been done, you think "the legals" are a formality. You will sign anything. You can avoid this trap by making sure your deal with the agent or landlord covers all of the terms that will affect you. If they do not know the answers, ask them to find out and tell you quickly. Get it in writing. You are not paying them! It is far cheaper than paying your solicitor to negotiate;
This also saves wasting solicitor's fees if you later decide to withdraw from the deal. You can use a Net Lawman lease document as a model version. The commentary will help you set up your shortlist and tell you what to expect;
If you take a lease of part of a building, such as a shop in a parade, you will find that some of the terms in the lease may be included for equality and fairness among the tenants. An example might be the division of cost among the tenants for repairs to the roof. It is unlikely that you will be able to negotiate any change on terms of this type. You need to consider in advance what they are before you waste time negotiating inflexible terms;
Some landlords run a multi-let building or estate on the basis of a "standard" business lease, because they have made special arrangements with a lender to maintain the lender's security by insisting that all units are let on terms which ultimately benefit the lender if the landlord goes bust. Such a lease is often referred to as of "institutional quality". A cynic might say it is the opposite of "tenant quality". A further reason for inflexibility is that the commercial agent now trying to sell you the lease, also "manages" rent collection and repairs and maintenance. They therefore have a strong interest in all the lease obligations being the same, since their job of managing would be more complicated if every tenant had different obligations and rights. One of your questions to the agent at the outset should therefore be as to the flexibility of the lease. If there is no flexibility you should look particularly carefully at the obligations you are being asked to sign;
Landlords - tips for negotiating the business lease terms
Generally speaking, the market allocates a higher return to property types and locations where the perception of risk is greater. Factors include;
The chance of tenant default;
Ease of re-letting if tenant defaults, and time taken to find new tenant;
Value of property;
Perception of increase in rental value, which will feed into a higher capital value;
Acceptability as security for a loan;
Extent of regular management work;
Cost of repairs and other expenses;
Location;
It follows that a multi-let industrial building in poor condition in a Northern industrial area may provide a rent yield of 15% - 20%, whereas a shop on Oxford Street, London may yield only 3%. Of course, the market tends to be risk averse, so you may find that the multi-let building gives you twice or more the net return on the shop;
Negotiate personally, or use an agent you can talk to. For all but the very smallest transactions, you are well advised to use the services of a commercial agent. But if the rent is low, you cannot expect him / her to be trotting out to your distant building every five minutes to see prospect after prospect;
For low cost transactions the best person to negotiate the deal is you, the landlord. If your tenant wants an up-and-over door or a different shop front, you can arrange the terms, the time and the rent immediately. If it goes through agents, you have lost another months rent;
For most transactions, use a commercial agent as an adviser, even if he / she does not show the property. The advice is usually worth far more than the cost;
Start with the terms you want to be included. You might like to use a Net Lawman lease document as a template and aide memoir at an early stage, so that you can be sure to ask your tenant the right questions. The advantage of this is that you may be able to avoid tying up the transaction with solicitors for months while you are receiving no rent. It is far better to negotiate the controversial terms yourself than to leave it to your solicitors to bat draft after draft to and fro. Furthermore, if your new tenant can tell his solicitor that he knows all about whatever points the solicitor raises, the solicitor will be less inclined to be seeking out points to score;
When you have negotiated a deal, make sure all the points you have agreed go out to the other side. Otherwise you will find that one or other of the solicitors is re-inventing the wheel;
Put the property into good repair. It is likely to be cheaper for you do so than for your tenant. The property will look better when offered, so will let more easily. You will start from a sound position, so the tenant will have to maintain in better condition. You will not be in breach of any borrowing covenant. Your property will have a greater value. Do we need to say more?;
If you want to maximise the value of your property as security for borrowing, make sure your solicitor is aware of this and is a commercial law expert. Small changes to the words of the lease may make a big difference;
If your property is multi-let or the units have common services of any sort, do make sure all the lease provisions are the same. You will create a nightmare if each tenant is allowed to negotiate different terms. Make sure the total obligations add up to 100% of the total cost. This requires separate consideration of each item of expenditure. When you come to offer units to let, you will find acceptance of your standard lease if you have considered the tenants likely reaction. If your solicitor thinks he is doing you a favour by producing a standard draconian draft, put him right. You want good tenants who pay your rent, not a reputation for machismo and a half empty building;
Commercial property leases for longer than three years generally incorporate a provision for the rent to be "reviewed" every three, four, or five years. The review is usually "upwards only". Infrequent reviews obviously lead to your total payment being less over the term of the lease;
Always obtain two guarantors for a limited company or one for a new sole trader. Many people operate their business on the basis that if it goes down that is no problem because anything of value is already in the name of wife, husband or mother. The safest guarantors are those most distant from your tenant, so try to avoid spouses and children.
Terms in your lease
Why the terms matter
Most business agreements serve two main purposes - first to record the terms agreed and secondly to provide protection to each party against a breach of the terms by the other. Many commercial agreements can be put to the back of the bottom drawer after signing and may never again see the light of day. A business property lease does not come into that category. It is therefore very important that each side is certain that every detail is appropriate and fair.
Landlords solicitor's costs
Landlords are property professionals. Even quite big tenant businesses rarely employ property professionals. As a result, the balance of property knowledge favors the landlord. Landlords are generally able to dictate terms with very little margin for the tenant to change them. One such term is the provision that the tenant should pay the landlord's solicitor's legal bill. This is an unfair relic from long ago, but many landlords still make it a term of the lease.
By far the best way for a tenant to avoid paying the landlord's solicitors is to make quite clear with the landlord or his surveyor agent when the deal is negotiated, that your offer to take the property is subject to your not paying the landlord's solicitor's charges. By doing this the tenant transfers the decision as to whether or not to accept the deal from himself to the landlord.
Psychologically a landlord is thus more likely to accept. Because so many tenants do now refuse to pay landlord's solicitor's costs, the landlord is unlikely to feel particularly aggrieved. To him, it is just a question of "some you win, some you lose".
Fix your own legal bill
Because leases are long and complicated documents, there is enormous scope for argumentative lawyers to push drafts to and fro over many weeks. Nothing focuses a solicitor's attention on the time taken so much as the proposition that he, and not his client, is paying for it. A fixed price quotation is therefore a splendid incentive to complete your lease efficiently.
Is the tenant allowed to assign or sub let?
Sub letting is generally out. There are sound legal reasons why a landlord should not permit sub letting. If a proposed lease is to someone whose business requires occupation of smaller parts by others, then he could insist that the tenant uses license agreements rather than sub leases to deal with the downstream occupation.
Assignment is where the tenant transfers the balance of his lease term to someone else. A tenant should understand that a landlord has accepted his package terms knowing the person with whom he is contracting. If the tenant is completely free to assign, then the landlord could find he has given consent to an assignment for someone who fails to pay the rent. The tenant however, really has to be able to part with his interest if he should need to do so. Both sides should therefore consider carefully the extent to which they might need to protect their rights on this question. It is likely to be concluded on the basis that the tenant is allowed to assign, but only subject to safeguards for the landlord.
If the person to whom the tenant assigns fails to pay the rent, the landlord can still come back to the tenant and ask him for the full rent. When the assignee himself assigns, then the original tenant is totally free of obligation.
by: Miriam Taylor
Budget 'needs To Support Businesses' Payday Loans No Credit Check: Smooth Way To Grab Instant Cash Three Best Ideas Explored To Start A Home Business. Why Is Blogging A Real Work At Home Business? Cash Till Next Payday-currency For Short Term Wants Cash Advance in Pennsylvania – Meet Your Small Fiscal Problems Easily Tips On How To Attain Excellent Fort Lauderdale Air Fare Specifically Made Business Travelers Newly Simple and wise choice with Business to Business portals! Posqx - Business Point Of Sale Technology Makes The Difference And Takes You Towards Achievement Home Collection Cash Loans – Get Simple Cash Anytime Hosted Pbx Solutions Offer Businesses Various Benefits Best Home Based Computer Business You Can Start Today. The Cost-Effective Benefit of Business Postcards