Lease Negotiations

Before entering into Leases of commercial properties, the Landlord and proposed Tenant will need to negotiate its terms. Landlords often employ surveyors to act on their behalf in this respect but set out below are those specific terms which usually provide the structure of negotiations.

Rent

The amount of rent payable under the terms of the Lease is obviously fundamental to both parties. The rent may be fixed for the entire term or may increase by a fixed amount at certain stages throughout the term. This may be preferable to either party due to the certainty it provides. However Landlords may wish to review the rent in accordance with the open market rent for such premises as this will increase the property's investment value.

Term

Landlords generally want as long a term as possible so that they have certainty that their property will be occupied with a steady rental income. Tenants sometimes also want a lengthy term to enable them to build up their business from those premises. Some will want a long enough term remaining to allow the business to be sold in the future. Other Tenants may prefer a short term to give them a degree of flexibility in case they outgrow the premises. Leases tend to be for a fixed term but could include rights to renew.

Landlord & Tenant Act Protection

The Landlord & Tenant Act 1954 gives Tenants a right to automatically renew their Leases at the end of the term. This is important to many Tenants as if they invest in the property and its location, they do not wish to find themselves in a situation where they then have to relocate at the end of their Lease because their Landlord refuses to renew the Lease. However Landlords often seek to exclude the Landlord & Tenant Act protection to give them flexibility in the event that they have different plans for the property at the end of the initial term of the Lease. Furthermore some Landlords do not wish to be under an obligation to renew a Tenant's Lease but instead would prefer to make that decision when the term comes to an end.

Break Clause

Tenants often want to have a break clause in the Lease, especially where the premises relate to a new business venture. In the event that the business proves not to be successful or conversely, the business swiftly outgrows those premises, a Tenant can bring the Lease to an end and move on without any continuing liability under the Lease. Landlords will generally prefer to avoid break clauses being granted to their Tenant so that they can be sure as to how long the property will be let. However if a property has been empty for sometime and the Landlord is keen to get a Tenant in, a break clause may be a good way of persuading a Tenant to initially commit to a property.

Repair Obligations

Landlords will generally want Tenants to take on a full repairing Lease so that they are responsible for keeping the whole of the building to a very high standard of repair. These are sometimes referred to as FRI (Full Repairing and Insuring) Leases. Tenants will only want to accept such an obligation if the premises are in very good condition at the beginning of the Lease. If they are not, the Tenant should limit the repair obligation to keeping the premises in the same condition as they are at the beginning of the Lease. The parties will often agree a "Schedule of Condition&quout; which will evidence the condition of the premises as at the start date of the Lease. Alternatively, a Tenant may only be willing to accept an internal repairing Lease and therefore not be responsible for the structural parts of the building.

Incentives

A Landlord may be willing to offer incentives to get a Tenant into their property in the first place. This might include rent free periods which are very common in the retail and office sectors. The Landlord may also be willing to pay costs towards fit out works for the premises. Break clauses may also form an incentive.

Security for the Landlord

A Landlord may have concerns whether a Tenant will be good for their rent, especially if they are a limited company. In such instances, the Landlord will often want individuals to act as guarantors. From a Tenant's point of view, having gone to the trouble of setting up a limited company, directors are often not keen to open themselves up to personal liability by giving guarantees. An alternative is a rent deposit deed which would be a payment of a sum of money by the Tenant that the Landlord would hold throughout the duration of the term in case the Tenant fails to pay rent or comply with the covenants of the Lease. From a Tenant's point of view, the disadvantage with this is that it ties up a large sum of money throughout the entire term.

This guide is merely a summary of the issues that might relate to such negotiations and we would always advise that you obtain legal advice as early as possible within any negotiations.

Contacting Us

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