Taking your first commercial lease

Some of the world’s most successful companies have started at home or in a garage, but at some point, it makes sense to move to business premises.  Committing to your first commercial lease is an important step in the life of a young business and as it is a binding legal contract, it is vital to get legal advice before you sign.

“Premises will make up a significant part of your total business costs” says Ian Cowan commercial property solicitor with Richard Reed, “so it is important to know exactly what you will be paying, your obligations and those of your landlord, and what flexibility you have if these premises no longer meet your needs.” Your solicitor will explain everything and help ensure that you understand the long-term implications.

The premises

The nature of your business will dictate the type of premises, the facilities and the space which you need – whether retail, industrial or office space.

Flexible shared office space is now widely available.  This can be a great option for a new business, because you can sign up for the space you need, ranging from a single desk to a whole floor of a building.  The monthly payments will usually include rent, business rates, services and utilities.  Flexible space means you know what you will be spending and allows you to expand or downsize easily but contracts vary, so you should get your solicitor to explain all of the terms to you.

If you opt for a conventional lease, the arrangements and documentation will be more formal.  The lease will identify the area being let to you, usually with an outline on a plan and a more detailed verbal description.  If you are taking a stand-alone unit, the lease may include the whole structure and exterior.  If you are taking a small part of a larger office block or a unit in a shopping centre, your lease will be ‘interior-only’, which means that it will not include any part of the structure or exterior.  It will include internal wall surfaces and some parts of the floors and ceilings.  Doors, windows and window frames are also usually included.  It is important to ask your solicitor to explain exactly what you are responsible for.

You need to be clear about what is included in the lease and which other areas you will be allowed to use, such as access routes, fire escapes and common areas like lobbies, bathrooms, lifts, staircases and car parks.  You should check whether you will be allocated designated parking spaces or simply given the right to park in whatever spaces are available.  If you need to put any equipment outside the premises (for example, a sign on the wall), your solicitor will need to discuss this with the landlord.

Length of lease

One of the hardest things for a young business to predict is how quickly it will grow and the impact on space requirements.  Some shared office facilities make it easy for startups to scale up and move from a shared desk to progressive larger offices.

If you are manufacturing, is it better to get more space than you need at the outset and sublet the space that you do not need in the short term?

The lease will be for a fixed period.  If you want the flexibility to end it early, your solicitor may be able to negotiate inclusion of a break clause.  If you are in breach of your obligations, your landlord may be able to apply to court to end the lease early.  Otherwise, if your business needs change, your only way out will be to find someone else to take on the lease or negotiate with the landlord.

Rent and other costs

Rent is usually expressed as an annual amount payable in four quarterly instalments, although your landlord may be willing to agree monthly payments for smaller premises.

Other costs like business rates, insurance, utilities, internet and services provided by the landlord may be included or you may need to factor these in on top of your rent payments.  The key is to make sure your solicitor has explained what costs you will have to pay on top of the rent, and whether VAT or stamp duty is payable.

The lease may say that the rent will be increased at fixed points during the lease.  For leases longer than five years, rent will typically be reviewed at the end of year five.  For shorter leases, rent may be reviewed annually by reference to the rate of inflation.  Depending on the nature of your business, the rent may also include a proportion of your turnover.  This is most common for shops and food and drink outlets.

Bear in mind that you may have to pay a rent deposit to the landlord at the start of the lease.  This is typically three to six months’ rent.  The landlord will be able to draw on this if you do not pay rent or fulfil your other obligations but it will otherwise be returned to you at the end of the lease.

Your obligations

The lease will set out a list of things you must do and some things you must not do.  The key obligations will be:

  • to pay the rent and other agreed costs;
  • to maintain the premises that are let you to, except where damage is covered by the landlord’s insurance;
  • not to alter the premises without the landlord’s consent;
  • not to transfer the lease or sublet the premises to anyone else without the landlord’s consent and not to share them with anyone else unless the lease says that you may;
  • not to use the premises for any illegal purpose and only to use them for the use set out in the lease; and
  • to leave the premises at the end of the lease in a good state of repair and empty, so the next tenant can go in without delay.
Forewarned is forearmed

Your solicitor is there to make sure you understand the obligations you are taking on and that the premises will meet the needs of your business.  With the benefit of good advice, you will avoid unexpected costs and maintain a good relationship with your landlord.

For further information, please contact our Commercial Property team on 0191 567 0465 or email [email protected].

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