However, before signing on the dotted line, it is very important to understand exactly what you are getting into. To avoid potential pitfalls, here are some issues that tenants should consider when taking on a commercial lease for the first time.
Identify the parties and the premises
Care must be taken to correctly identify the parties to a commercial lease as well as the premises in question. The lease should be taken in the name of the business rather than in the name of a person as leases usually contain onerous obligations and can expose the lessor to significant liability. You should also check that the precise square footage of the premises is clearly defined in the lease and matches the premises that you were expecting.
Think about the length of your lease
Commercial leases are generally for a fixed term, typically three, five, ten or 15 years depending on the business sector. Although it may sound obvious, it is essential that the length of your lease fits in with your commercial objectives. Committing to a long lease when you have a long-term plan to relocate may not be in your best interests. Ideally, as a tenant, you also want to be protected by the Landlord and Tenant Act (1954). The Landlord and Tenant Act (1954) allows commercial tenants to remain in occupation of the premises even when the contractual term has come to an end, and to apply to the court for the grant of a new lease.
Ask for a break clause
If your business starts to struggle and you need to end your lease early, you won’t be able to do so unless your commercial lease includes a break clause. A break clause essentially enables you (and possibly the landlord) to end the lease early. The right to break may arise on one or more specified dates or be exercisable any time during the term on a rolling basis. Before signing your lease, you should check the conditions of any break clause. It is important that both parties are aware of the other’s right to break the lease and the required notice that may need to be served.
Be aware of hidden costs
When it comes to commercial property, there are certain costs that are unavoidable. Having said that, there are also hidden costs that you should be aware of. A repairing obligation can, for example, prove a real burden. To avoid this burden, you should ensure that the definition of ‘Premises’ does not include areas that you have not anticipated you need to keep in repair. You don’t want to find yourself responsible for major works or repairs to your premises that are disproportionate to the length of your commercial lease.
You should also be wary of any additional service charges. Additional service charges often apply to premises where there are multiple occupants and the landlord provides a range of services for those occupants, such as cleaning, heating and general maintenance. Before signing a commercial lease, you should ask your landlord to provide an exact breakdown of costs so that you can make an informed decision about whether or not the lease is financially viable for your business.
Don’t forget about assignment and subletting
If it’s not easy to terminate your commercial lease, being able to assign or sublet it may be a huge help to you. Assignment involves transferring the remainder of your lease to another party whereas subletting creates a new lease where you become landlord to a sub-tenant. However, whether you can assign or sublet your commercial premises will depend on the terms of your lease. If you want to keep your options open, you should try and get your landlord to agree appropriate assignment and subletting terms before you sign the lease.
Commercial lease terms can be difficult to understand, and once signed can be very tricky to get out of. Before signing a commercial lease you should seek advice from one of our commercial lease lawyers. If you have any questions regarding commercial leases please contact James Williamson.