Negotiating a Commercial Lease
When setting up your first retail or hospitality business you are very likely to need premises.
Unless you are in the fortunate position of being able to mortgage or outright buy the property that you plan to operate from, you will require a lease agreement between yourself and the landlord. Having a lease is important, it offers both parties security and states what happens in the event of either party not keeping up their end of the deal. The first step is to get legal advice from a lawyer who is specialised in negotiating commercial leases. Do not ask family or friends to help you with this! A lawyer who is used to dealing with commercial leases will not only save time, they will know the local property market and potentially be able to help you negotiate a better deal than you could secure on your own. A lot of serious commercial landlords will not engage with parties who don’t have a legal representative. The aim of this article is to avoid the common mistakes that first time business owners make when negotiating their first lease.
1. Who will the lease reside with?
This will differ depending on the company structure that you choose. If you are a limited company, it is generally best to agree the lease between the limited company and your landlord. In the event of your business not being successful, the limited company will be liable for the remainder of the lease and not you personally. This means that you could avoid bankruptcy in the event of your business falling on hard times.
Most landlords will ask for a deposit in the case of failure to make rental payments, this will often be a multiple of your monthly rent. Deposits can be negotiated, so if you are struggling for cash flow, consider asking for the amount to be reduced. You could also ask for the deposit to be returned on production of one or two years’ profitable accounts.
3. Rent-free period.
It is extremely common to negotiate rent free periods from 2-12 months in order to help you get your business get up and running. Depending on how long the premises have been vacant will dictate how much rent-free you are likely to be able to negotiate. Sometimes, depending on the length of lease and circumstances you may be able to gain a contribution towards works that need to be done in order to bring the property up to standard. For instance, external decoration or if you are going to do work that will add value to the property such as fit an industrial kitchen. Remember, once the empty property relief period expires, the landlord will have to pay business rates. When you enter the property the liability for these payments passes to you and the landlord is instantly better off.
4. Stepped rent.
Another common practise is to negotiate ‘stepped rent’ this allows the landlord to reach a desired rental value over a number of years.
5. Rent reviews and increases.
Your lease should be clear on when and how often your landlord will impose a rent increase. You can further protect yourself by capping or linking rent increases to price indexes, preventing unaffordable increases being imposed.
6. Type of lease.
You must check the repairing obligations, most commercial leases are FRI (fully repairing and insuring). This could leave you liable for roofing repairs unlike most residential leases. You should also check if you will be required to return the premises to the same state, as they were when the lease commenced. If you are, consider hiring a specialist to produce a ‘schedule of condition’ this is important as it could save you from large dilapidation charges and should only cost a few hundred pounds. Tenants improvements should be negotiated in advance with your landlord.
You should check if the property is committed to use certain utility suppliers. Often there will be quarterly service charges levied for maintenance of communal areas such as car parks, lifts, stairwells and gardens - you should check these and consider if you wish to cap or restrict increases on these. Always ask for an indication of the last 12 months’ charges.
You will be responsible for arranging and payment of public, contents and employer’s liability insurance. Do this early and properly, there are horror stories of refurbishments being flooded during building works and insurance not being in place to cover the damage. The general buildings insurance will also be arranged by the landlord, but in a FRI lease you will be responsible for paying whatever deal the landlord has negotiated. Check up on this.
If things are not working out it can sometimes be useful to build in a break. This can be mutual (both ways) or one way, in your favour. A break like this allows you to exit the lease early should things not be working out.
10. Study the rental rates
Study the rental rates in your area and ask for opinions. Your lawyer or the property agent marketing the property may be able to advise if the PSF (per square foot) rate is above or below market value. Remember that although property agents are instructed by the landlord, they are incented to lease the property in order to be paid. They can be an ally during the negotiation.
11. Carry out the proper surveys.
Asbestos can be expensive to remove and before you begin any refurbishment works you will need to provide the contractor with a certificate. Ask the landlord if they have a copy. If you are responsible for the structure of the building, then also consider a structural survey of the building.
12. Get a long enough lease.
Get a long enough lease or ensure you have first option to renew. If your business turns out to be hugely successful, the last thing you want to do is have to re-negotiate everything and end up with a less attractive deal. Pubs are often taken on 10-30 year leases and I have heard of bigger companies negotiating 99 year leases.
A note on the author
This article was written by Robin Knox, CEO & Co-Founder of intelligentpos®: producer of small businessiPad EPOS software. Robin worked as a manager in retail and hospitality before starting up several small businesses. Today his mission is to provide small business owners with a powerful, affordable EPOS solution to help them run their businesses more profitably.
Information contained within this article may not be accurate and the author and connected companies do not accept liability for advice given should it be incorrect or cause losses. Information was correct at time of publishing to the best of the authors knowledge and may become irrelevant over time.