Most businesses will need to occupy premises for various aspects of their operations, whether for office space, storage, manufacturing or retail. The amount of rent payable is a primary consideration for any business considering occupying commercial premises under a lease, but there are other costs to consider when negotiating the terms of a business occupation.
We have set out below three of the most common ways that businesses are exposed to financial costs in leases, and suggested ways to mitigate those costs.
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Repairing obligations
The tenant’s repairing obligation can represent a huge potential dilapidations liability if the lease is not carefully drafted to ensure that the tenant is only responsible for repairing those parts of the premises it is occupying, and to a standard consistent with the condition the premises were in when the tenant took occupation.
Our advice: Make sure that the definition of the premises aligns with the extent of the property the tenant intends to occupy and avoid taking responsibility for structural deterioration. Consider attaching a photographic schedule of condition to the lease to limit the tenant’s repairing obligations where the premises are in poor condition when the lease is entered into.
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Service charge
A commercial tenant can face significant unanticipated outgoings through the service charge payable to the landlord, particularly where the service charge provisions in the lease are very wide and the landlord undertakes substantial projects during the term.
Our advice: The service charge provisions should be limited as far as possible to prevent the landlord from being able to recover excessive costs such as unnecessary upgrades to the site, or other expenses which do not benefit the tenants. In addition, consider negotiating a service charge cap to prevent unforeseen increases in service charge and to allow the business to budget for the lease term with greater certainty. In all cases, we recommend that service charge statements for the previous 3 years and the current service charge budget are reviewed carefully by a prospective occupier.
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Exit options
Unless a break clause is included in the lease, a tenant has no legal right to end the lease early and could face costly negotiations with the landlord if the property is no longer required by the business, or if the tenant becomes unable to meet the costs of occupying the premises during the lease term. Business occupiers should also carefully consider their ability to sell (or assign) the lease, sublet the premises, or share occupation during the term as alternative ways of parting with the some or all the premises or offsetting rental outgoings before the lease has expired.
Our advice: Any break clause should be checked by a solicitor to ensure that it will operate as intended, and to minimise the risk of disputes with the landlord. The tenant’s ability to deal with the premises will be dictated by the alienation clauses within the lease, and business occupiers should try to negotiate as much flexibility as possible to ensure that the business has various options available to it should its property requirements change during the lease term.
Conclusion: Knowledge is power
The examples outlined above are some of the key risks posed to a business in entering a lease of commercial premises, but we understand that the pressure of business requirements can sometimes force a rushed decision to accept terms which could expose the business to unforeseen costs. Our Commercial Property specialists are here to discuss your property requirements with you and help to minimise your exposure to costs in the future by providing you with clear, pragmatic advice about your lease agreement so you can focus on your business.
If you’re needing legal advice in regards to commercial lease agreements, property development, property finance & banking, property investment & asset management or property litigation. contact our highly experienced commercial property team 0161 930 5151 or email commercialpropertyteam@gorvins.com and we will be in touch.