Finding the ideal property for your business can enhance your operations and maximise profitability, provided you have secured favourable lease terms. Unfortunately, many people enter into a commercial lease before doing their due diligence and suffer costly consequences. To ensure you’ve got every base covered, take a look at these common mistakes businesses make when entering into a commercial lease and find out how to avoid them.
Misunderstanding Repair Obligations
It’s easy to assume that you will only be liable for repairing the interior of the property you’re renting or – worse still – that your landlord will be liable for all repairs, but this is rarely the case. Instead, commercial leases are often ‘Full Repairing and Insuring’ (FRI) leases, which means the tenant is responsible for repairing and paying the cost of insuring the building, including its structure.
N.B. When the extent of your responsibilities isn’t clearly defined, disagreements over structural repairs or boundaries can quickly spiral into property ownership disputes, particularly if title deeds or responsibilities aren’t well-documented.
Clauses relating to repair obligations can have a substantial impact on your financial liability, so it’s essential to review them carefully and consider whether you’re prepared to accept the terms offered. While landlords may prefer to offer an FRI lease, this doesn’t mean that you won’t be able to reduce your liability by negotiating and modifying the type of lease.
Overlooking Potential Rent Increases
When you agree to rent provisions, it’s vital to check whether these can or will change over time. If you have a ‘turnover lease’, for example, your rental payment amount may be linked to the profitability of your business. Alternatively, you may pay a fixed or ‘base rent’ with regular rent escalations based on market factors, such as the Consumer Price Index (CPI).
Additionally, you’ll need to check the lease to determine what rights the landlord has to increase the rental price and whether there are any limitations in this regard. Any increase in rent can have a notable impact on your operations, so don’t overlook this critical element before you sign, or you could find yourself subject to sharp rent increases more often than you realise.
Accepting Any Lease Term
Finding new premises for your business is an exciting time, which means it’s easy to get carried away in a bid to secure the property before someone else does. However, it’s important to think carefully about whether the proposed lease term meets your requirements.
If a lease is too short, you may find it difficult to make long-term business decisions. Conversely, a multi-year lease offers limited flexibility and may place you under undue stress if your circumstances change. Consider the optimal lease length for your needs and use this as a starting point to negotiate the best terms. Adding a break clause can be an effective way to balance security with flexibility but, remember, these can have downsides too.
Assuming Break Clauses Are One-Way
A tenant only break clause enables you as the tenant to terminate the lease early, provided specific conditions are met. This can be beneficial for tenants as it offers flexibility and means you aren’t tied into an extended lease if your business doesn’t flourish. However, a break clause can mean tenants have a lack of stability too.
People often assume that only tenants can enact a break clause, but this isn’t the case. Both tenants and landlords might be able to rely on a mutual break clause to end the lease early, so read the wording of the document carefully to determine when, if and how your landlord could terminate the lease.
Excluding ‘Security of Tenure’
In accordance with the Landlord and Tenant Act 1954, ‘Security of Tenure’ gives tenants the right to renew their lease at the end of the lease term, provided certain conditions are fulfilled. This is particularly important for commercial tenants, as you would not want to be forced out of the premises if your business is generating high revenues from its current location.
As you might expect, landlords are often keen to exclude Security of Tenure rights from commercial leases as the provision places constraints upon them and grants tenants more rights. If you want to maximise the security of your business and plan for your future, be sure to check that Security of Tenure is not excluded from the lease before you sign it.
Ignoring Additional Payment Obligations
If you’ve paid close attention to clauses pertaining to rent provisions, you may assume that you’ve protected your financial interests and know exactly what you’ll need to pay to your landlord each month. If you’ve failed to check whether additional payments are required, however, you could be in for a costly surprise.
Additional payment obligations can include a range of costs, such as property maintenance and/or a contribution to the repairs of shared parts of the building. In many instances, a hefty service charge will be payable in addition to your monthly rent provision.
Furthermore, professional service fees are likely to be incorporated into the commercial lease as an additional cost. Some leases state that tenants are liable for their landlord’s legal fees in relation to lease variations or consents, for example.
Failing to Get Legal Advice
A commercial lease is a legal document that will have a significant impact on your business and your life for many years to come, which is why it’s vital to seek professional legal advice before you decide whether the proposed terms are right for you.
As well as providing a clear explanation of what each clause means in ‘real-world’ terms, a commercial property solicitor can determine whether the proposed terms are representative of standard lease terms or whether your rights are being eroded.
Negotiate Favourable Lease Terms with Heald Nickinson
A commercial property lawyer can guide you through the negotiation of the Heads of Terms and help to secure more favourable commercial lease terms. From lower rent provisions and more flexible break clauses to minimising additional payment obligations and varying the lease term, there are a variety of ways you can negotiate to ensure you get the best possible terms before you sign.
To find out more or to seek advice before you enter into a commercial lease, contact our expert team now on 01276 680000 or send us a message.
