Legal Things to consider when Leasing a Business Premises

The emotions felt when committing to a lease of a business premises can be a heady cocktail of excitement and terror. To help reduce the element of terror in this mix, it is advisable to obtain legal advice before signing on any dotted lines. Of course, it is always helpful if you are somewhat knowledgeable on the subject too. The following are a few of the key issues your solicitor will look out for.

1. Costs

Who is paying whose costs? It is usual that the landlord will have his legal costs paid by the tenant. This can, and always should, be limited to a reasonable figure. It is of course possible to negotiate alternatives to the usual approach.

2. Length of the lease

Business leases are traditionally longer than personal leases, and normally last between three and twenty years. For a start-up company it can be quite daunting to commit to such a length of a lease. In such a case, an alternative option such as working from home may be preferable. Landlords are generally reluctant to lease for shorter periods, although in the current economic climate they will negotiate more readily. A shorter lease, maybe on a monthly or weekly basis, will give you maximum flexibility, but will be less secure, may work out more expensive, and will give you less scope for modification of the premises.

3. Early Termination Clause

Effectively, this clause allows you to buy out of the lease. A specific lump sum is agreed, payment of which enables you to walk away from the lease prior to it ending.

4. Interest on the security deposit

Security deposits are understandably necessary for landlords, and a standard requirement. Try to negotiate that it will accrue interest which is payable to you. Otherwise, your security deposit is effectively an interest free loan.

5. Use of premises

Very importantly, your solicitor will have to establish whether the premises can be used for the purpose of your business. To do this you must contact your local authority in order to establish the approved use of the building under its planning permission. If the approved use of the building differs to that of your business, your solicitor should be able to apply for a change of use. Such an application is not guaranteed to be successful – for example, an application to establish a pub in a solely residential area is unlikely to succeed. Your solicitor should also ensure that there are no restrictions on the use of the premises contained in the lease.

6. Listed building

While operating a business out of a listed building may seem like a good idea in theory, the reality of it is another thing. If the building is listed this will restrict the manner in which you modify the premises for signage, will restrict any extensions, and may even prevent you from making adaptations to the interior for business purposes. Government specifications for products, methods, and materials to be used when adapting listed buildings can result in far higher costs than if the building is unlisted.

7. Repairs

Ensure that it is clear who is responsible for what repairs. Generally, the landlord holds this responsibility.

8. Rent Review

The inclusion of a rent review clause in a lease is standard. This will establish when they will occur, and can limit the level of increase at that time.

9. Lease renewal

Ensure that you have an option to renew clause. This should include a reasonable rent for the renewal period, or a formula to obtain the rent figure, as landlords may look upon the lease renewal as an opportunity to raise the rent considerably. Remember that while you may not want to move, your landlord will certainly not want to have to try to find a new tenant.

10. Personal guarantee

A personal guarantee of the lease is usually required when the landlord commits to undergo works on the building for the benefit of the tenant. These are often for a minimum period of five years. Try your best to avoid having to give any personal guarantee at all, or if it cannot be avoided then try keeping it between 1 and 3 years. Be prepared to walk away from a lease requiring a longer personal guarantee – it simply is not worth the risk.

11. Maintenance of common areas

Where the premises in question are part of a larger building with other tenants in it, the tenant is often charged a fee for the maintenance of common areas. Ensure that it is clear what exactly is included in exchange for these fees, and that the fee is capped.

12. Insurance

It is very important to have the property insured from the perspectives of both parties involved. For that reason it is possible to negotiate to split the cost of the insurance of the building itself.

13. Ownership

It seems like an obvious one, but your solicitor will have to establish that the proposed landlord actually possesses the right to lease the premises to you.

14. Right to sublet

Ensure that you establish whether you have the right to sublet all or part of the premises. This is of utmost importance in case your business has to move out of the premises, or finds that the premises are larger than required.

The above are just a few of the many things to be considered, and legal advice really is essential. Even with legal advice, going in to negotiations with your eyes open to the many issues involved will ultimately be to your benefit.