Acquiring a lease of commercial property for the first time? What should you know?

A lease gives you, the tenant, a right to exclusive possession of premises for a defined amount of time. This is referred to as the ‘term’.

It will contain contractual obligations on you and your landlord in connection with your use and occupation of those premises. These obligations are referred to as ‘covenants’.

It is important that you are aware of all covenants when entering into a new lease or taking a transfer (referred to as an ‘assignment’) of an existing lease before you sign on the dotted line.

Heads of terms

In most cases your landlord will issue heads of terms setting out the main terms of the arrangement, before legal costs are incurred.

It is important that you seek legal advice at this early stage as you will need to be confident that the terms offered by the landlord suit your business - and your budget. This will save you time and money in the long run.

Your budget

You will need to be confident that you can afford your chosen premises. This means finding out as much information about the financial liabilities under the lease as soon as possible. Key issues are:

Rent – what is the level of annual rent? Can this be negotiated down? Is VAT payable on it? When is it payable?

Rent review - Depending on the length of the term it is likely that the landlord will want the level of the rent to be reviewed periodically. For example, if you were taking on a new 10 year lease, the lease may provide for the rent to be reviewed every five years.

You need to find out how the rent is reviewed. Is it by agreeing fixed amounts, by reference to market value or something else? Does this suit your situation? Can this be negotiated?

It is important to note however that in almost all cases the rent review will only ever go up, and at best it will stay the same.

Service charge - If you are taking a lease of part of a property, the landlord will be responsible for maintenance of the ‘common parts’, such as shared facilities, driveways and pathways, the external and structural parts of the building, and insurance of the building, subject to a contribution from you.

What are the service charge costs and what proportion will you be obliged to pay? Is it a fair proportion according to your proposed use? For example, you do not want to have to contribute towards the capital costs of replacing a lift if you are on the ground floor!

Stamp duty land tax – this is a tax on property transactions. There is a complex formula for calculating the liability based on the level of rent and the lease term. You will need to ask us to calculate if any liability will be due as this tax will be payable on completion of the lease.

Land Registry fees - If the term of your lease is more than seven years it will need to be registered at the Land Registry. We will deal with this on your behalf but it means paying a Land Registry fee, which is determined by reference to the value of rent, on completion.

The premises

As mentioned above, if you are taking a lease of part of the property the landlord will take on the responsibility for exterior and structural parts and you will be responsible for the interior and non structural parts. If you are taking a lease of the whole property, you will most likely be responsible to maintain and insure everything.

It is important therefore that you inspect the premises to establish what condition they are in. If you have concerns, in particular where you have responsibility for structural parts, you should arrange to have a survey. In some situations you can agree with the landlord a schedule of condition; this will limit your repair obligation to the condition of the premises at the date of the lease and the landlord cannot require you to return it in any better condition.

Use

Has the landlord consented to your required use? Do the premises have the correct planning consent for your intended use? If not you will need to consider either asking the landlord to apply for the relevant consent, or making the application yourself.

Your solicitor will also need to check that the use is not restricted in the landlord’s title, as this is separate from the lease terms and planning conditions.

Staying in the premises

Is your lease protected? Will you have the right to a new lease at the end of the term of your lease? This is important if you have established your business and you want assurances that the landlord cannot require you to vacate at the end of the term.

Similarly if your business grows, or reduces you will want to know that there are adequate provisions in the lease to enable you to assign it or to sublet it. Landlords often impose conditions in both situations and you will want to make sure the lease terms are as flexible as possible.

The above is only a summary of the main terms to look out for. If you are considering setting up a new business and taking on commercial premises it is important that you take both valuation and legal advice as early as possible. This could save you a great deal of time and expense.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.