Whether you are a tenant or a landlord entering into a lease agreement on a commercial property it is crucial that you understand the terms of the lease and have negotiated the best possible outcome. Commercial leases can be complex, knowing what to look out for and when to engage a property expert can save time and money. Here’s what you need to know:
1. Commercial leases are different than residential leases.
A commercial lease is a contract between a business tenant and landlord for use of commercial property. Commercial leases have longer lease terms with more responsibilities for tenants.
2. No such thing as a standard lease
All commercial leases are different although certain clauses may be the same each property’s lease is tailored to suit its specific requirements.
3. The rent payable will depend on the lease and the negotiated terms.
There can be extra costs such as VAT and service charges, insurance payments and commercial rates.
4. Most leases will include a rent review clause.
A rent review clause states that the rent payable be reviewed every specified number of years, usually 3 to 5 years, in line with market values.
5. The fixed term specifies the duration that a tenant has the right to occupy the property.
The fixed term can be short or long and can be with or without the right to terminate early.
6. A ‘break clause’ may entitle either party to end the lease before the contract date is reached depending on how it is worded.
The break clause is usually subject to the fulfilment of certain conditions e.g. written notice to be received by a certain date or may be subject to a penalty.
7. Stamp Duty Tax may be payable on the proposed lease.
Currently 1% of the average annual rental amount is payable in Stamp Duty on a Lease for a term not exceeding 35 years or for any indefinite term.
8. A lease may be classed as a ‘FRI’ lease – Full Repairing and insuring or ‘IRI’ – Internal Repairing and Insuring.
A tenant who takes on an FRI lease bears full responsibility for the maintenance and repair of the property internally and externally. In an IRR lease the tenant is responsible for only the internal repairs and decorations with the landlord being responsible for the external upkeep. The latter is usual in the case of multi tenancy situations where the tenant may pay a service charge for external maintenance.
9. Leases usually have a clause that restricts assignments, subletting or transfer of the lease to another party but consent cannot be unreasonably withheld.
Subletting occurs when a tenant permits another party to lease the rental property that the tenant has leased from the landlord. Assignment is where a tenant transfers their entire interest in a tenancy to a third party. Both can only take place with the consent of the landlord. If premises are assigned without consent the landlord may not recognise the new tenant but consent cannot be withheld without good reason.
10. Most leases require a personal guaranty or security deposit.
Some leases will require a Company Directors to stand as guarantor for compliance of lease obligations. By signing such a guarantee, a Company Director will be putting their personal assets at risk. If a Director is asked to sign a guarantee it is important that they fully understand their obligations under the Lease. As an alternative to a personal guarantee, a tenant could offer a set rent deposit. If a Landlord will only accept a personal guarantee, then there may be scope for negotiating a limit on the guarantee.
Conclusion
Lease terms can be complicated and often difficult to agree on. The implications of certain clauses are often not immediately apparent from either a practical or a legal point of view.
To ensure that the terms are favourable to you it is best to seek professional advice from an experienced Chartered Surveyor who can negotiate terms on your behalf. Often tenants and landlords fail to address issues which are of fundamental importance to them, early advice ensures that the transaction happens smoothly, quickly and without room for error.
Contact us at O’Neill and Co for expert advice on commercial lease agreements.