INTRODUCTION:
If you are negotiating and agreeing heads of terms to take a new lease (or a renewal of an existing lease) there are some things that you should bear in mind. This briefing note sets out some of the issues to consider in those negotiations, to put you in a stronger position and help you get a better deal.
TERM:
The term (i.e. the length of the lease) needs to be long enough to provide you with the premises you need for the period you might reasonably need them, but not too long. This will depend on all the circumstances in each individual case. Remember that if you want to leave the premises before the end of the term and have no right to break the lease, it will be your responsibility to find a third party to assign the lease or sublet to (if permitted by the lease). You should assume that you will be liable for the rent and other liabilities under the lease for the whole term.
RENT FREE PERIOD:
Do not hesitate to seek a rent free period. This is usually at the beginning of the term and can commonly be for 3 or 6 months. It will help cashflow and the savings can cover the cost of initial fitting out works and decoration.
BREAK OPTION:
If you are not sure at the outset how long you might need the premises for, it may be possible to negotiate a right to break the lease before the expiry of the term. In order to be effective, a tenant’s break option should not be subject to onerous preconditions. The landlord might want to negotiate a landlord’s break option also – this should generally be resisted for obvious reasons.
STAMP DUTY LAND TAX (“SDLT”):
SDLT is a tax payable by the tenant calculated in general terms by multiplying the average rent for the first five years of the term (including VAT, if payable, on the rent) by the number of years in the term. If that figure exceeds £150,000 SDLT will normally be payable at a rate of 1% on the value that exceeds £150,000. The SDLT implications should be considered at the outset, and weighed up against other considerations. For example, it may be more advantageous from an SDLT point of view to take a shorter lease initially with an option to renew, rather than a longer lease with a break option as no refund of SDLT is available if a lease is ended before the end of its original term.
SECURITY OF TENURE:
Statute provides that business tenants have security of tenure (i.e. the right to remain in occupation following the expiry of the lease, and to take a new lease on equivalent terms) unless either the parties agree otherwise and follow a prescribed procedure or certain statutory exceptions apply allowing the landlord to oppose a new lease. Landlords usually prefer that leases should be excluded from security of tenure in order that they can be sure of getting the premises back after the expiry of the agreed term. However, from the tenant’s point of view, security of tenure can be very valuable and you should only agree to exclude it if you are confident that you will not want to remain in occupation at the end of the lease. As a general guide, the longer the term, the more the tenant would expect to retain security of tenure.
RENT REVIEW:
The initial rent is clearly a matter for negotiation between the parties. In a lease of anything longer than just a few years, the landlord is likely to require provision for upwards-only rent review, such that the rent can increase to reflect the market value of the premises throughout the term (but will not decrease if the market value falls). There are many different types of rent review clauses – for further information please see our article Rent Reviews in Commercial Leases: A Tenant’s Perspective.
GUARANTEES AND RENT DEPOSITS:
If the tenant is a company with a modest balance sheet, the landlord may be nervous about its ability to pay the rent and may require the directors to stand as guarantors. This exposes the directors to personal liability, thus negating the advantage of the company’s limited liability status. From the directors’ point of view, personal guarantees should therefore be resisted.
Landlords also often request a rent deposit, particularly if the tenant is a new company. This creates a cashflow disadvantage for the tenant; unfortunately the tenants who will be most adversely affected are the ones whose landlords will most ardently require a rent deposit. If the tenant has a good record of profitability (particularly if on an upwards trajectory) and of paying its rent, then a rent deposit should be resisted. In some cases it may be possible to limit a rent deposit to a period of time, or until the tenant’s business has been profitable for a period of time. Again this is a matter for negotiation.
REPAIRS:
Beware – an obligation to keep premises in good repair and condition includes an obligation to put them in good repair and condition if they are not in such condition at the outset of the lease. This may not be appropriate if the building is old or if the term of the lease is short. A tenant should consider the extent of the repairing obligation very carefully and ensure that it is not taking on a liability which is disproportionate to the value of the lease. Additionally, if the tenant is required to pay a service charge (e.g. in respect of upkeep of common parts), it may be appropriate to agree a cap on such payments, i.e. that the service charge payable never exceeds a certain figure.
Breaches of repairing obligations and subsequent dilapidations claims can be very expensive and cause a lot of inconvenience to tenants.
SCHEDULE OF CONDITION:
In many cases it will be appropriate to limit the tenant’s repairing obligation to keeping the property in no worse a state of repair and condition than at the date of the lease, as evidenced by a schedule of condition attached to the lease. The cost of preparing such a schedule of condition at the outset (usually by a surveyor), could save considerable time, money and trouble later on.
ASSIGNMENTS AND SUBLETTINGS:
The landlord is likely to want to restrict the tenant’s rights to assign the lease or sublet. In most cases it will be appropriate to provide that assignment and subletting of the entire property are subject to the landlord’s consent, such consent not to be unreasonably withheld or delayed. Depending on the nature and configuration of the premises, the tenant may also wish to have the flexibility of being able to sublet part of the property.
ALTERATIONS:
The tenant should obtain the landlord’s consent at the outset to the tenant’s proposed alterations. Any further alterations during the term are likely to require the landlord’s consent; such consent should not be unreasonably withheld or delayed. It is usually a condition of such consent that the alterations are reinstated at the end of the term, however this can be onerous and may not actually be necessary in the circumstances. Where possible, the tenant should seek to ensure that alterations are not subject to reinstatement.
SUBJECT TO CONTRACT:
Negotiations and heads of terms are not binding on either party until contracts have been exchanged or a lease has been completed. Until that point, either party is free to change their mind and/or walk away. It is good practice to mark correspondence and heads of terms as “Subject to Contract” in order to make intentions clear. However, once a point has been formally agreed in the heads of terms it becomes more difficult to negotiate, therefore if you have concerns it is better to take advice at an early stage.
SUMMARY:
This article does not purport to cover all of the points that should be considered when taking a lease, however we hope it might be helpful as an overview of some of the main issues that should be considered ideally before you reach the heads of terms stage.
FURTHER INFORMATION:
If you have any questions regarding negotiating a lease or require additional information or assistance, please contact Debbie Turner or Annabel Jump on +44 (0)333 122 0010 or by email: advice@dixcartlegal.com
