You’ve managed to find suitable premises to rent. The next step is to negotiate the terms of the lease. Read a blog by our lawyers Anthony Collins Solicitors with some top tips...
Here is a useful checklist of some of the principal things members should consider when taking on a new lease.
A lease is a legally binding contract which documents the arrangement on which the Landlord has agreed to let the property to you.
1. Seek help and support from experts
Your lease is likely to be one of your most costly outgoings so therefore it is important that you fully understand the terms of the agreement in which you are signing up to.
Before entering into any negotiations with the Landlord directly, it would be wise to appoint a Property Agent or Surveyor. They would be able to advise you of the level of rent you can expect to pay in your region and which key terms you should expect to negotiate (called ‘Heads of Terms’). They can also manage negotiations by communicating with the Landlord or Landlord’s agents on your behalf.
To ensure you are fully aware of your rights and responsibilities under the lease, it is strongly recommended that you seek independent legal advice from a commercial property solicitor. They will advise you of the terms of the lease and the implications of those terms to your organisation.
You will have to agree with the Landlord the length of time in which you intend to occupy the property for. This is known in the lease as the ‘Contractual Term’.
In deciding the length of lease, you must consider the needs of your organisation and future plans. A shorter lease would provide more flexibility and would be preferable if you wanted to expand. A longer lease would give you greater security however would bring longer term liabilities.
3. Landlord and Tenant Act 1954 (“LTA 1954”)
Another important factor you need to consider is whether you want a lease which is protected by the LTA 1954. This means that you will have the right to renew the lease at the end of the Contractual Term and is otherwise known as having security of tenure. The Landlord is only able to object to the renewal on limited grounds. If you are choosing to take a longer lease and wish to remain in the property for as long as possible this will be an important factor to consider. If you only want the lease for a short-term you may choose to exclude the LTA 1954 provisions. The Landlord will often seek to exclude the LTA 1954 provisions, so this will be a point of negotiation.
4. Rent and Rent-free periods
Your most expensive outgoing under the lease will most likely be the rent you agree to pay although service charges and insurance contributions may also be payable (and you should seek details from the landlord at the outset). You should consider whether the annual rent which is being put forward is at acceptable level for your organisation given the local market conditions. You should also consider whether you wish to pay rent monthly or quarterly.
If the Landlord is not prepared to negotiate the level of rent, they may be able to offer you a rent-free period. This is a period during your tenancy (usually at the start) where you are not expected to pay rent. Landlords may be willing to offer rent-free periods in order to get you signed up or in order to cover the costs of repair/fit out works which you might need to do before moving in.
5. Rent Review
It is likely that the Landlord, especially in longer leases, will try and get you to agree to an increase of the rent at certain stages during the lease e.g. every 3 or 5 years.
The annual rent can be reviewed in a number of ways. The most common is an open market rent review which means that the rent will be adjusted to reflect the current market level at the date of the review. Otherwise an increase in accordance with RPI could be used. Your advisors will be able to provide further advice as to the least disadvantageous method.
6. Rent Deposit
You should be aware that the Landlord may require a Rent Deposit from you when entering into the lease. A Rent Deposit is a sum of money is paid to the Landlord as security for your payment of rent and performance of your obligations under the lease.
You should find out from the Landlord whether a Rent Deposit is required and if so the sum of the money to be deposited and the terms upon which the Landlord could retain this. This will need to be taken in account in your negotiations and for determining whether the lease is affordable for your organisation.
7. Break Clauses
If you want to have the flexibility of terminating the lease before the end of the Contractual Term, you should consider negotiating a break option. You could agree to break on a specified date or at any time during the term or on a rolling basis by giving a certain period of notice. Negotiating a break option might enable you to terminate the lease if, for example you decided to move to alternative premises in the future or if the premises were not working out as you had hoped.
8. Repairs and Alterations
When negotiating the terms of the lease, you should be aware of any terms which indicate the lease is to be a ‘full repairing lease’. This means you will be responsible for all repairs to the property inside and out. This includes the structure and any rebuilding works. Ideally you should be responsible for the interior only and the Landlord should retain the responsibility for the structure. If you are unable to remove this obligation, for example if the lease is to be a long lease, you should look to prepare a Schedule of Condition. A Schedule of Condition is a photographic report which gets attached to the lease and evidences the condition of the property at the start of the term. By preparing this report, the lease can be drafted so that it limits your liability to keep and repair the property to the standard of condition which is evidenced by the report.
Repairs can be very expensive and if you considering taking on a ‘full repairing lease’, it is strongly recommended that you carry out your own survey, searches and enquiries of the property before signing.
If you are planning to make any alterations to the property, you should discuss your intentions with the Landlord and obtain their consent to your proposed works.
9. Permitted Use
Before entering into the lease, you need to ensure your chosen premises are suitable for your intended use and have the requisite planning permission. The definition of ‘Permitted Use’ in the lease needs to fully reflect all of your intended uses of the property.
It is hoped that the property will work out for the benefit of your organisation but, if for any reason, this has not been the case, you will want the ability to vacate the premises in order to save costs. If the lease does not have a break option (or even if it does) you should ensure that you have the ability to assign or underlet the property to another organisation. This means that another organisation can ‘step in’ and take over your obligations under the lease. The Landlord will seek to apply strict conditions to any such assignment/underletting and we would recommend that you take appreciate advice on these clauses.
Written by Anthony Collins Solicitors
We have worked with our partners Anthony Collins Solicitors to produce this blog to keep our members up to date with the latest legal developments to affect co-operatives. If you have any questions about this content, please contact the Advice Team at [email protected]