Taking a new commercial lease can be a daunting experience, especially if it is your first commercial property. To protect your financial and wider commercial interests, it is imperative that you negotiate a commercial lease that works for you, rather than against you. This guide highlights some of the common pitfalls in business property leases.
The list is by no means exhaustive and they are no substitute for proper legal advice. They should, however, serve the important purpose of demonstrating the potential risks present in taking a new lease. These five pitfalls are;
1. Rent Reviews
2. Repair obligations
3. Term length
4. Assignment and Underletting
5. Break rights
1. Rent Reviews
Rent reviews involve the periodic reassessment of the rent you are paying. The longer the term of the commercial lease that you undertake, the more likely it will be that you will have a rent review. Rent Reviews can be extremely complex and come in a variety of forms (for more information see our guide ‘Rent Reviews Explained’). Though upwards only open market rent reviews are the most common, the form of rent review is up for negotiation. The frequency of the rent review is also up for negotiation – make sure that you are not caught out with overly frequent rent reviews. A solicitor will be able to advise if you are agreeing to something unreasonable.
2. Repair Obligation
The majority of new commercial leases are fully repairing and insuring (or FRI Leases) meaning that it is your responsibility as the tenant to repair and pay for the insurance of the premises. Exactly what ‘repair’ is will depend on the wording of your Lease. Landlords will often seek to increase the level of responsibility on their Tenant so it is important to be alert and aware during Lease negotiations. Repair clauses are one of the most commonly litigated aspects of commercial Leases so it is important to be aware of the degree of your responsibility at the outset.
3. Lease Term
It may sound obvious, but it is essential that the term of the commercial lease fits in with your short term and long term commercial objectives. Committing yourself to a long Lease when there is a long-term plan to relocate, downsize/upsize or purchase may not be in your best commercial interests. Planning ahead is essential, especially when there are restrictions on your ability to break, assign or underlet the Lease.
4. Assignment and Underletting
One of the biggest mistakes new tenants make is thinking that they can assign (transfer/sell) their Lease as they please onto a new incoming Tenant. Firstly, leases can and, depending on the type of transaction, often do prohibit assignment. Secondly, even if you are able to transfer the Lease, you will usually continue to be responsible for the incoming tenant’s ability to comply with the terms of the lease. Your right to underlet (creating your own tenancy) the premises can also be restricted. Ensure you are fully aware of your rights to assign and underlet before taking on the lease (for more information see our guide ‘What’s your exit strategy?’).
5. Break Clause
A similar mistake commonly made by tenants is assuming that they have a right to terminate the Lease when they want, without consequences. Such rights to break the Lease are common but not by any means a given. It is just as important to recognise that, even where a break right does exist, the Landlord may share the same right as you to determine the lease. This creates uncertainty for your tenancy and, more crucially, your business (for more information see our guide on ‘Break Clauses’).
Expert advice from a reliable source…
It is imperative to sound out any unnecessary risks and liabilities when taking on a new lease. The value of expert advice on the terms of your new lease cannot be measured, especially when compared with the added financial liability taken on over the course of your term. Our team of commercial property lawyers have a breadth of experience and expertise to ensure that your financial and commercial interests are safeguarded.
Call us on 020 7228 0017
Email us: info@hanne.co.uk
