As an entrepreneur, you are likely going to be seeking out commercial real estate at some point. This article will give you an insight into commercial leases and some of the key points to look out for.
First things first; a lease is a contract between a tenant and the landlord. It’s essential to read the document cover to cover. There may be clauses that you do not agree with, so be sure to negotiate. Such clauses can have a significant impact on your business if left unchecked. Here are some of the key clauses to watch out for:
The Term
How long are you signing for? Sounds simple, doesn’t it? But be sure to negotiate the right term length for your rental agreement. While a short term is great for convenience, if you do decide to stay on, don’t be surprised if the rent is hiked upon renewal. Too long a term and you could be lumbered with a space you no longer need. So think carefully.
Cost
How much is the rent? This is the one most people pay attention to. But how does the rent have to be paid? Is it, monthly, quarterly or yearly? Often rent is paid in advance so if rent is quarterly you will have to stump up 3 months’ rent upfront. Be sure to negotiate a rent-free period if significant works need to be done to get the premises up to speed.
Usage limitations
The lease may contain restrictions on the types of business that can be carried out at the premises. Be sure to check that you can actually carry out your trade at the premises. Remember, it’s your responsibility to check the premises meets the needs of your business and has all the necessary planning consents to carry out your trade. If it does not, you will need to apply to your local planning authority. Each business has its own rules regarding planning, premises and regulation. So be sure you have all the relevant consents ticked off before you sign on the dotted line.
Outgoings
Are bills such as electric, gas and water included? Usually, with commercial leases, you are responsible for all the bills. You will also need to look at whether buildings insurance and business rates are included in your outgoings.
Repairs
Unlike residential letting, it’s usually the commercial tenant who is responsible for repairs. This can come as a shock if this is your first time renting as a business! Check the lease to ensure you know exactly what your responsibilities are. Often the commercial tenant will be responsible for internal repairs while the landlord will be responsible for external but not always. Some leases are full insuring and full repairing – in essence, you will have to make good and renovate the premises at your own cost regardless of the original condition. At the end of the term, you will hand back to the landlord a fully renovated premises.
Subletting
Do you have permission to sublet all or part of the property? Many leases will not permit subletting but having the ability to rent out part of your premises could be a lifesaver in leaner times. If you have the physical space it might be worthwhile to negotiate subletting into the lease.
Termination
Being bound to a long lease can be an incredible burden should things not go to plan. Ensure notices for termination of the contract are reasonable. Can you get out of the lease if things go wrong? If so, you should be clear as to the notice you need to give should you wish to terminate and what would be the effect on any deposits the landlord may hold.
Eviction
Obviously, after non-payment of rent, you can expect eviction proceedings from most landlords. but the contract should stimulate a time-frame as to how long after any transgressions can the landlord begin to take back the premises. Bear in mind that evictions can also be triggered by other events such as failing to keep up with repairs or nuisance, so ensure you understand what the obligations are.
Break Clause
A Break Clause allows either party to end the lease early. The lease will contain a date after which the lease can be terminated. There are three ways a break clause can work. Firstly. a rolling break under which the lease can be terminated at any time. Secondly, the lease may be terminated after a specified period of time. For example, after a minimum of two years termination is possible. Thirdly, The lease can be terminated on an agreed fixed date. Understand that break clauses work both ways, so landlords will also have the ability to terminate once conditions of the break clause have been met.
Deposit
Most leases will require the tenant to pay a deposit to the landlord. The deposit is paid before signing of the lease. The landlord will retain the deposit and in the event of a breach of the agreement, the landlord will be able to keep the deposit. The tenant will not be able to access the deposit until the end of the lease. Be sure to check how much of a deposit is needed, 3-6 months is not uncommon. The landlord may ask for additional security such as a guarantor. In the event of a breach, the landlord would be able to chase the guarantor for any costs associated with the breach.
VAT/Sales tax
VAT (UK, Value Added Tax) or sales taxes (USA) can add significant amounts to the costs of taking on a lease. Check the small print to ensure you fully understand what additional taxes you are liable for. In the UK most commercial premises are exempt from VAT but not all. Commercial landlords can volunteer to pay VAT, in which case VAT will be added to the rent. In the USA sales tax will vary from state to state, so ensure you have a clear idea as to what you are liable for.
Service charges
Services charges are additional costs you may need to pay in addition to the rent. Landlords will charge service charges to cover the costs of a number of services such as cleaning common parts of a building, redecoration, gardening, security etc. It’s important to understand what these service charges are for and have an idea as to the entire cost of service charges for your lease.
Is the lease an actual lease or is it a licence?
It’s very important to be clear as to what kind of rental agreement you are entering. If you have a licence the landlord will be granting you permission to use the premises at their discretion and you will have limited control over the premises. A lease on the other hand will give you contractual rights over the property concerned, therefore you will have more control. For example, a co-working space will usually give you a licence agreement. They may not allow you access after certain hours and you may be restricted to certain areas of the building. A lease on the other hand will allow you to come and go as you please and give you exclusive interest over the property.
Rent review
The rent review will allow the landlord to adjust the rent in accordance with market conditions. In real terms, the rent review will always be up regardless of market conditions! Be sure to check if there are any fixed percentage increases or if the rent review allows for negotiation. Be sure to negotiate a rent review date that is a reasonable distance away from your start date.
Disputes
Your lease may stipulate how disputes should be handled if there are any disagreements between tenant and landlord. You will need to follow the instructions of the agreement before seeking any court action. The lease may insist on a settlement meeting, mediation or arbitration prior to taking any further action.
Landlord Access
A lease will give the tenant exclusive rights over a property. Therefore, if the landlord wishes to enter the premises the lease will need to include conditions when he/she can do so. Landlords may insist on having access for carrying out repairs, if so ensure the lease gives you adequate notice. There may be clauses included that give the landlord access after a certain period if rent goes unpaid. Be sure you understand what access rights the landlord has and under what conditions can they be exercised.
Final Thoughts
You should take notes of the important clauses and ask for the contract to be sent to you before you sign the lease. Always get legal advice before signing a lease, if you don’t and you miss something it could be costly.
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