Negotiating a new business lease

Getting the right lease

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Thousands of businesses in the UK take out new leases on properties every month. These are legal contracts which can bind the parties for a number of years. Given this, it is surprising that one party will sometimes simply sign the lease without taking proper advice, often resulting in a lease which is constrictive and unfair, and can provide serious and expensive problems later down the line. The comparatively small expense of having a lawyer check and negotiate a business lease can prevent this happening. We have included below the main areas you should expect your lawyer to be examining when considering a new commercial lease. We have also included a case study of a recent situation in which aggressive negotiation was necessary early on to save a client falling into a so called ‘stitch-up’ lease agreement.

Case Study

Our client was an office-based business. We received a proposed lease from the solicitor of the new landlord. The lease contained several ‘stitch-up’ provisions – i.e. completely unfair and unacceptable terms which were unreasonable to accept. We had dealt in a similar position with the same firm of solicitors when acting for G4S, a major national company, and had successfully argued to have them remove all of the unfair conditions on that occasion. This time, they removed them again without any complaint, even though our client was not nearly as economically desirable a tenant from the new landlord’s point of view. The result was a fair lease for a company who could well have expected to have come off worse if our approach had not been uncompromising on their behalf.

Principal Terms in a Commercial Lease (Heads of Terms)

The principal terms of a lease are frequently set out in a note prepared by the letting agents for the landlord and given to prospective tenants with the particulars. They are usually very brief:

e.g. “A FR&I (full repairing and insuring) lease for 10 years at an exclusive rent of £X, reviewable, upward only, at the fifth anniversary”.

This leaves many uncertainties which could result in a lot of time being spent on negotiating the details of the lease. Of course, the longer the time spent, the bigger the legal fee will be. Therefore where there is more detail for individual clauses in the Heads of Terms, a great deal of time can be saved in negotiating the Lease. The uncertainty will of course also be removed, so that the value of the lease can be properly known in the context of the business. So if a commercial property solicitor is instructed early on, the Heads of Terms can be prepared with both the Landlord and the Tenant being made fully aware of these principal terms and accepting them at the outset.

Searches

For any property, whether freehold or leasehold, a Purchaser’s/Tenant’s solicitor should make three searches (any mortgagee will also require this). These searches are Local Authority, Water and Drainage and Environmental. Depending on the type of property, further searches may be required or considered, particularly for a development site, including public utility searches, commons registration, index map, coal mining etc. A Local Authority Search will show the recent planning history, highway proposals, compliance with statutory regulations affecting the property and anything else disclosed in a public register. A Water and Drainage Search will indicate whether the property is drained, for both foul and surface water, into a public sewer and whether the property is served by a mains water supply and how. An Environmental Search is little more than a desk-top (administrative) search of previous and nearby potential contaminative users, whether the property is in a flood basin etc. An audited Environmental Report from a suitable professional firm is sometimes necessary, but it is expensive, and it is only usually a worthwhile expense where there is a proposed new development where the planning authority may impose this as a planning condition before granting planning permission.

Title Investigation

This is necessary for any property. It is a process which confirms the Landlord’s right to grant the lease and ascertains any restrictions or covenants affecting the property or its use / intended use.

General

There are several things to consider when negotiating a new lease. These may or may not be picked up in the lease document. For example, is the new lease going to be contracted out? That related to whether or not the protections of the Landlord and Tenant Acts are going to be applied). Other issues include the responsibility for internal and external repairs and decorating, permitted uses for the property, and issues over ending the lease or assigning it to a third party. There could be also be service charge and insurance obligations to be considered.

One of the most important aspects is the way that rent review provisions are laid out (see section on rent reviews on the left of this screen).

Also important is the amount of up-front deposit or other security that the new tenant will provide.

All these factors, and many others should be explained at the outset by any experienced commercial property solicitor in order to guide the client through the transaction so that he or she can concentrate on the logistics of the business, instead of getting bogged down in legal considerations.

Lease Assignment / Transfer

If the lease being taken on is not a new lease, but is a transfer of a third party’s lease, similar steps to considering a new lease’s proposed terms must be taken. An experienced commercial property solicitor should first of all satisfy him or herself that the lease itself is good and marketable. It is absolutely fundamental when negotiating any business lease to ensure it does not become a noose around the tenant’s neck and is marketable and satisfactory to a mortgagee or lender’s requirements.

Legal Charges

These usually take the form of mortgages. The lender is a mortgagor and borrower is a mortgagee. Lender will usually instruct independent solicitors to act for it and the borrower will ensure that his solicitors, acting on the purchase or lease, would negotiate any relevant mortgage documentation with the lender’s solicitors and deal with the requirements the lender makes. This will include satisfying all title and searches requests, and making pre-contract enquiries, satisfying all execution requirements and all registration details. There may be other demands from the lender if the borrower is a company. If the property to be charged is leasehold the lender may require a full Lease Report in one of the usually accepted formats. This can be very lengthy and detailed, particularly if more than one leasehold property comprises the security.

Final Note: The above represents a basic guideline of the issues, but in no way is meant to replace good legal advice.

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