Commercial Leases: Traps for the Unwary
For a tenant, entering into a new commercial lease is an important step. The rent alone is usually a big financial commitment, but there are often other issues in the lease that can be an expensive trap for the unwary.
Here are some of the things to watch out for:
- Length of the Term: This is probably one of the first things that you will consider. You will want a term long enough to give you some security, but you will also want some flexibility to move if you need to expand or relocate. One way of doing this is to have a longer term with an option to terminate earlier, usually at a designated date - this is called a break clause. Some leases give the tenant an automatic right to renew at the end of the term, but it is more common for this to be excluded. If this is important to you then you should raise it with the landlord when you are negotiating the heads of terms.
- Repairs: Almost all commercial leases give the tenant responsibility for maintaining and repairing the property. Tenants are often surprised to find that a standard repairing clause will make the tenant responsible even for defects that were apparent before they took occupation. This can lead to an expensive claim from the landlord at the end of the lease. Before entering into the lease, it is important to obtain a survey and then make sure that the lease excludes responsibility for repairing any defects that the surveyor identifies.
- Check the Plans: It is important that they reflect the extent of the premises which you are intending to occupy. Do they include any outside space that you are expecting to use? Do you need car parking?
- Rent and Rent Review: The initial rent is obviously important but you must also make sure that you understand how it will be reviewed, and when. Rents are normally reviewed either by reference to the open market or by linking the rent to RPI. The rent review will almost certainly be upwards only meaning that you won't benefit if rent or inflation falls.
- Assignment and Subletting: If you need to move during the term, then the lease may allow you to transfer the property to a new tenant or to grant a sublease, which might be of the whole premises, or just a part. The landlord will have substantial control over your ability to do this. This clause is most important for tenants signing up to a long lease with no break clause. Tenants entering into short term leases may not be worried about having this right.
- Alterations: Tenants moving into new premises often want to make changes to suit their business. The lease will give the landlord substantial control over the changes that you can make. If necessary you should obtain the landlord's consent to your proposed fit out works, before committing to the lease.
- Permitted Use: The lease is likely to restrict the way that you can use the premises. A use clause that is too restrictive might limit your ability to transfer the lease to another business. On the other hand, if the rent review is by reference to the open market, a restrictive user clause might be helpful for the tenant in arguing for a lower rent.