Tips for tenants: negotiating a business property lease

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Introduction

This article is a guide for tenants

After salaries, the cost of your business lease is likely to be the biggest overhead you have. Further, a business lease involves a commitment for a substantial period of time, so it is critical to get the right premises on the right terms. Here are a few tips:

• Write down absolutely all the features you need in your new premises and prioritise them. Check every property you visit against your list, and make sure you account for any additional cost or disadvantage which each may present;
• Short leases are often called tenancy agreements; however there is no difference in law. You can negotiate your deal for any period you like. If your landlord likes the thought of your becoming a tenant he will ask for a long term. If you do not wish to be tied then you will negotiate a short term. Start with the deal that you want, not the one that is presented to you;
• Business property tenants have less statutory protection than residential tenants. (But see below). Most commercial landlords are either professional landlords or use professional agents, or both. They are experts in every aspect of commercial property. You may not be. Most commercial agents are also experts at negotiating lease terms on behalf of their clients. Again, you may not be. So do your research and be prepared to stand your ground on things that really matter;
• As a result of ‘freedom of contract’, thus a free market for commercial property "everything is up for grabs". So think about it like this - if the agent or landlord thinks you are likely to take the property on offer it is unlikely that they will move on the terms. If you make it clear that you have several alternatives, then you will find that the previously "fixed" terms suddenly become very negotiable. How much you can negotiate depends too upon the state of the market. A landlord may well be tempted to hold out for his set price and terms if he thinks someone else will come along soon and accept them;
• If the market in the sort of property you want is “down” at the time you are searching, and therefore sounds like a good deal, then you should make sure that there is some sort of a ceiling on the new rent when it is reviewed. You do not want to be paying three times as much in three years time;
• Business property leases for longer than three years generally incorporate a provision for the rent to be "reviewed" every three, four, or five years. The review is usually "upwards only". Infrequent reviews obviously lead to your total payment being less over the term of the lease;
• How does it work? Commercial agents will usually entice you into a deal by setting out only half of the terms which are important to you. Once you have agreed your solicitor will receive a draft lease document, which gives all of the bad news. By now you are psychologically and practically committed to the property, and you may find your solicitor's concern to be an irritation. Because you think the deal has been done, you think "the legals" are a formality. But don’t just sign anything. You can avoid this trap by making sure your deal with the agent or landlord covers all of the terms that will affect you. If they do not know the answers, ask them to find out and tell you quickly. Get it in writing;
• …why? …because you are not paying them! It is far cheaper than paying your solicitor to negotiate. This also saves wasting solicitor's fees if you later decide to withdraw from the deal. You can use a Net Lawman lease document as a model version. The commentary will help you set up your shortlist and tell you what to expect. By providing the initial document yourself, you can start on your terms and gain an advantage. Links to our template documents are at the end of this article;
• If you take a lease of part of a building, such as a shop in a parade, you will find that some of the terms in the lease may be included for equality and fairness among the tenants. An example might be the division of cost among the tenants for repairs to the tiled floors. It is unlikely that you will be able to negotiate any change on terms of this type. Thus, consider in advance what they are before you waste time negotiating inflexible terms;
• Some landlords run a multi-let building or estate on the basis of a "standard" business lease, because they have made special arrangements with a lender to maintain the lender's security by insisting that all units are let on terms which ultimately benefit the lender if the landlord goes bust. Such a lease is often referred to as of "institutional quality". A cynic might say it is the opposite of "tenant quality". A further reason for inflexibility is that the commercial agent now trying to sell you the lease, also "manages" rent collection and repairs and maintenance. They therefore have a strong interest in all the lease obligations being the same, since their job of managing would be more complicated if every tenant had different obligations and rights. One of your questions to the agent at the outset should therefore be as to the flexibility of the lease. If there is no flexibility you should look particularly carefully at the obligations you are being asked to sign;
• Whether you are looking at new built space or not, always use an experienced commercial valuer. He will help with:;
• Rental valuation;
• Negotiating the terms you really want;
• Advising you as to what is or is not possible;
• Preparing a schedule of dilapidations;
• Instruct your surveyor precisely, but be sure to negotiate a fixed price first! Decide where you want the help and pay only for those services. But beware! Your surveyor too may be reluctant to get involved in the detail he would usually leave to solicitors;
• Despite the obvius, do not assume that your landlord is trying to take unfair advantage. There may be concessions you can make to the landlord in exchange for concessions that he can make to you. Do not assume that every aspect of the negotiation is contained in the lease;
• Finally, remember that in all matters relating to commercial property, the only rule is "there are no rules". You are simply in a commercial negotiating position. You simply don’t have to accept terms that you are not happy with – but you do have to be prepared to keep looking!