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Pitfalls to look out for when taking on a commercial lease

Taking on a lease of commercial premises is a big undertaking. The lease is a complex document and you need to understand exactly what you are signing to avoid nasty surprises later on.

Length of the lease

While a long lease may cost less than a shorter one, you could find yourself tied to a property and unable to end the lease if you want to.
Ideally, if you take on a long lease, you should have the option to end it partway through, known as a break clause. This is likely to cost extra, but it is preferable to being forced to continue renting premises, sometimes for years, after you wish to leave.

Subletting and assigning a commercial lease

The lease may allow you to assign or sublet the property to someone else if you no longer want to occupy it yourself. You may be required to sign an authorised guarantee agreement, guaranteeing that the new tenant will adhere to the terms of the lease. However, an authorised guarantee agreement only applies to assignment (and not subletting).
If the new tenant does not comply with the lease, you would be financially liable for their failure to do so. The landlord could also insist on you taking back the lease.

Security of tenure

Taking on a short lease could be a problem if you decide you want to stay on but your landlord does not want to renew the lease.
The Landlord and Tenant Act 1954 gives commercial tenants a right to renew their lease when it expires, known as security of tenure, but often landlords will write a clause into the lease excluding this right. This means that they can insist that you leave at the end of the lease period.
It is advisable to try to negotiate with the landlord for a lease that allows you security of tenure as this will avoid the disruption of having to move and is likely to make your business more valuable.

Permitted Use

The user clause will detail how you are allowed to use the premises, to include the activities you may carry out, what type of business you may run there, what you can store at the premises and what changes you can make to accommodate your enterprise.
You need to think about how you may alter or expand in the future and make sure there is scope to allow this.

Responsibility for repairs and condition report

A commercial tenant is usually liable for keeping the property in good and substantial repair and condition. If you are renting the whole of the property, then this is likely to include the whole fabric of the building, outside as well as in. If you sign a full repairing and insuring lease, you will also be liable for the expense of insuring the property, along with maintenance, decorating and repairs.
Even if you are not responsible for the disrepair and there was a problem before you moved in, you will often be liable for all repairs which could include expensive items such as a new roof. This might mean a sizeable bill for dilapidations at the end of the tenancy when the property is handed back to the landlord.
To ensure you do not have to pay for disrepair that existed before you take on the tenancy, it is advisable to have a schedule of condition or condition report drawn up and attached to the lease. A qualified surveyor should prepare this. It will include full details of the state of the property when you move in and the lease should specify that you are only required to restore the premises to the condition they were in when you signed the lease.

Service charges

If the lease requires you to pay a service charge, you should consider asking for this to be capped, particularly if you are renting an older building.
Service charges generally apply when you are only renting part of a building and cover items such as building maintenance, buildings insurance, security and cleaning. If large items of expenditure arise, such as the need for a new roof, this can be claimed from tenants by way of the service charge. By ensuring that the service charges you pay are capped in the lease, you will be protected from exceptional costs.

Rent Review

The lease will contain details about the frequency of rent reviews and on what basis the review will be carried out. This could be based on the value of the property, by way of a fixed increase or in line with the Retail Price Index. You should negotiate the details of the rent review process to make it as favourable as possible.

In Summary

There are numerous pitfalls in commercial leases and it is always recommended that a tenant take legal advice before signing. Your solicitor will be able to spot any unusual or particularly onerous terms and conditions and explain the extent of the responsibilities that you are taking on.

If you are considering entering into a commercial lease and you would like to talk to one of our commercial property experts, feel free to ring us on 01753 876800 or email us at law@owenwhite.com.

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