Taking on a Commercial Lease? Here's a guide to help navigate the pitfalls.
August 03, 2016
Renting commercial premises for the first time can be a huge step for any business, not least the hefty financial commitment it can bring. And with the myriad of clauses and regulations in any lease, it’s easy to get trapped into a rental agreement for five years when you may want to change location after three. And what if a business wants to change what they sell in their premises after a while – is there a restrictive clause in the lease that says you can’t?
To avoid potential pitfalls, here are some regulatory and statutory issues that should be considered when taking on a commercial lease of property for the first time.
Room for growth
Before taking space, check if the landlord will rent out by floor so when your business grows, your office space can too.
The UK has a lot of old buildings that are rented out as commercial premises so it’s imperative to check whether the premises have the most up-to-date infrastructure for your needs; for example, raised floors for sockets, suspended ceilings for cabling as well as the speed and adaptability of broadband and other key technology.
Length of lease
Leases typically last five years. If this is too much of a commitment, tenants need to make sure that they can assign the premises to another business during this time.
But be aware that some new tenants might be unwilling to assume building dilapidation liability (and the costs this could bring) if taking an assignment of the lease for a shorter period. This means the original tenant would still be liable. Dilapidations are areas of the building that are in a poor condition or have shortcomings, which tenants have to remedy or pay to have fixed under their lease covenants.
It’s also worth considering a break clause to get out of a lease if needed. A tenant may need to pay more rent at the beginning but if something does happen to your business, a rolling break clause is worthwhile as it will allow the tenant to leave at any time giving around three months’ notice to the landlord.
Leases normally have clauses that specify the type of activity the tenant can carry out in the premises. For example, if a restaurant starts to engage in online sales with food items being collected from the shop, this may well break the clause, unless provision for a future change of use was included in the lease when it was negotiated at the start.
Spread the cost
Some businesses may want to share commercial premises with another tenant to spread the cost. It’s worth checking if part of the space can be sub-let to another tenant. Contact a local business organisation to see if it has (or could develop) an online forum, whereby businesses can talk to each other about sharing or swapping premises.
Forfeiture allows a landlord to bring a lease to an end if a leaseholder defaults on any of the terms. It is frequently used by landlords to terminate commercial leases, but it is not always the best option for them or the tenant. Claims for financial loss by a tenant are a possibility if a lease is terminated in the wrong way. The tenant might be eligible to bring a claim for unlawful forfeiture and can pursue compensation for the losses arising from their exclusion from the premises.
Minimum energy efficiency standards
In 2015, energy efficiency regulations set out minimum energy efficiency standards for England and Wales.
From 1 April 2018 these regulations make it unlawful for landlords to grant a new lease of properties that have an energy performance certificate rating below E. Tenants should check with landlords what building work may be planned to make the building fit for purpose and whether renting out a new floor or area is a possibility to avoid disruption.
After 31 March 2023, existing leases of premises rated E or below could load upgrade costs on to unwitting tenants. Seek advice from a lawyer and surveyor if you’re a tenant and have concerns in this area.
Article taken from The Guardian on Wednesday 3rd August 2016