Are you a first-time commercial tenant?

Here at Birkett Long, we act for many different types of landlords and tenants. But, if this is your first time taking on a commercial property as the tenant, it can be quite daunting. Especially when trying to negotiate the Heads of Terms with a seasoned landlord, or their property agent. This pandemic may have given you some inspiration to “set up shop” yourself, and hopefully, some pointers in this article will put you in good stead when taking on your first shop, restaurant, or office.

Annual rent and length of the lease 

Once you have found your ideal property, the two main terms on your agenda would be the annual rent and length of the lease. 

Annual rent

The strength of the market will dictate your bargaining power and usually, there is not much room to negotiate the rent down, although it is always worth attempting. But instead, you may be able to negotiate an initial rent-free period of a month or two. 

This way, you will be able to occupy the property during the rent-free period and decorate it to your branding. The sooner you complete the decorating, the sooner you can open and turn a profit. 

Length of lease

The second term on your agenda is the length of the lease. Now, the average term is 5 years. After this initial period, you should be in a position to gauge your growth and decide on whether you need to move to larger premises, or if you are content and established where you are.

Whilst negotiating the length of the lease term, you will need to bear three things in mind. These are whether: 

• you need a break clause
• you can assign the lease
• the lease has the renewal protection under the Landlord and Tenant Act 1954 (the “1954 Act”).

A break clause

A break clause would allow you, and sometimes the landlord too, to terminate the lease before the full lease term has come to an end. You would want to do this for two reasons: 

1. Either you have not been as successful as you had hoped and you want to hand the property back to the landlord. Or, 
2. you have been overly successful, and you need to find a larger premise. 

You will tend to find, if negotiated correctly, that you will have a break clause every 3 years, or longer for terms of 15 years and above.

If you cannot negotiate a break clause, then you should have the ability to assign the lease to another party, if you were to encounter either of the two scenarios above (success or failure). There are usually two types of assignment provisions, either: 

• there is a complete ban on assigning the lease, which is legal, or 
• you can assign with the landlord’s consent (which is not to be unreasonably withheld). 

The landlord may place some conditions on their consent, such as asking for a higher deposit, or that you will need to act as guarantor for the incoming tenant, or both.

What is the 1954 Act?

Unlike residential tenancies, commercial leases of this type have automatic protection under statute to be renewed at the end of their term, subject to certain strict grounds for repossession. This is generically referred to as protection under the “1954 Act”, or similar idioms. 

This way, you can remain in an established location and keep the goodwill you have gained over the years. The landlord may insist that the lease is excluded and contracted out of the protection from the 1954 Act. But this should be highlighted to you at the beginning of the transaction by the agent, for you to decide whether this is commercially acceptable to you.

Rent deposit

As a fledgling business, with no financial history, the landlord may insist on a rent deposit, or for you to personally guarantee the tenant’s obligations under the lease, or both. The latter is usually for newly incorporated limited companies. This is to be expected and over time, once you are more established, you will be able to enter future leases without these requirements. 

The rental deposit will be kept in a “deposit account” by the landlord in escrow, and will remain your money throughout, unless you default on an obligation under the lease. 

Then the landlord can deduct any default monies from the deposit account. If this occurs, you will usually be in breach of the lease if you do not “top up” the deposit back to the agreed amount. Usually, the deposit will be kept for the length of the lease term and returned to you when the lease terminates if you are not in default.

If the landlord requires you to be a personal guarantee, then your personal assets may be vulnerable, if the tenant defaults on their obligations under the lease. The same applies if you were to take the lease in your personal name, and you fail to comply with the obligations under the lease.

If you need any legal assistance with your lease, whether it relates to any of the above, or something that I have not mentioned above, such as subletting, making physical alterations, rent reviews, liability for repairs, or “fitting out” then please get in touch.