Have you outgrown your current business premises? Are you considering leasing new commercial premises?

Tuesday 6th April 2021

Before you sign off on Heads of Terms for a new lease there are various matters to consider, legal and otherwise but make sure that you have thought through the following points carefully as they could save you thousands of pounds later on if you agree them with your landlord or their agent at the outset.

Limit your repair obligations by reference to a photographic schedule of condition.

If you take on board only one of these points let it be this one. Dilapidations claims by landlords at the end of commercial leases can amount to many thousands of pounds and, even if settled by commercial negotiation between dilapidations surveyors on behalf of each of the parties (as they often are), it can still be a lengthy, costly and stressful process.

To put yourself in the best position at the end of your lease and minimise the repair works you may be required to undertake or pay for, when negotiating Heads of Terms for a new lease insist that you are not required to put or keep the premises in any better state than it is in when you take it. This must be evidenced by a detailed written and photographic schedule of condition, ideally prepared by an experienced surveyor, showing the state of repair and condition of the premises at the outset of the lease in as much details as possible. The schedule is agreed between the parties and attached to the lease before the lease is completed.

Any claim for breach of tenant repair obligations (whether during or at the end of the lease) must take into account the evidence in the schedule which prevents tenants having to leave premises in a better state than they took them.

Whilst primarily of benefit to the tenant, schedules of condition can also benefit the landlord as they provide concrete comparable evidence for landlord’s surveyors to use when preparing dilapidations schedules which can reduce the time taken to settle claims at the end of the lease.

How long do you want to be tied in for?

Breaks and Options

When agreeing to take a new lease, it can be difficult to say with any certainty how long you may wish to remain in those premises. Lease terms can be agreed for any number of years but commonly leases are signed for 3, 5, 7 or 10 years. If you want the flexibility to be able to remain in the premises for a longer period if all goes to plan but the freedom to leave if circumstances change and you need to expand quicker than you planned or downsize if necessary you may wish to ask for a break option in the lease to allow you to exit part way through the lease term by serving notice on the landlord. An alternative to this would be to agree a shorter initial lease term but with a contractual option to renew the lease if you wish to stay. This would provide certainty that you may remain for a longer period without having to commit to it from day 1.

A shorter lease with an option to renew can also be beneficial from an ‘SDLT’ (Stamp Duty Land Tax) position as if you are liable to pay SDLT on your lease, this would be calculated on the length of the lease. Break options are not taken into consideration when calculating SDLT liability. A tenant may therefore be liable for SDLT on a 10 year lease at the outset of that lease, even if it exercises a break option after 5 years. No SDLT would be refunded by HMRC.

Assignment and Subletting

Another way to enable a tenant to move on from premises part way through a lease term is the ability to assign (transfer) the lease to another tenant (an assignee) or to sublet the premises. These are also possibilities to consider and negotiate at the outset of your lease as the ability to assign or sublet either whole or part(s) of the premises during the lease term must be documented in the lease. The lease will contain various conditions which must be complied with if assignment or sub-letting is to be permitted by the landlord. Usually on assignment of a lease the original tenant will be required to sign an Authorised Guarantee Agreement (AGA) guaranteeing the incoming tenant (assignee).

These are just a few of the points which the Commercial Property Solicitors at Waldrons are able to advise you on in relation to business leases and once Heads of Terms are agreed we can help you to negotiate and complete the lease documentation itself.

As Heads of Terms are often agreed before tenants instruct us it is important that you are aware of the potential pitfalls and negotiate the best terms for your business at the outset.

Please contact Sarah, Peter, Michelle or Natalie in the Commercial Property Team at Waldrons on 01384 811811 if you require assistance with leases or any other Commercial Property matters. We are always happy to talk to you before you agree final Heads of Terms if you have any questions.