13 November 2014
Negotiating a property lease
Businesses negotiating a lease need to ensure key terms – such as rent, length of lease, break clauses, costs – give them what they want. Alison Taylor, senior associate commercial property lawyer, explains what to look out for and the factors that will help in negotiations for a good deal.
The terms of a new lease are generally freely negotiable. But if you are taking on an existing lease, or sub-letting premises, the landlord is unlikely to be prepared to vary the terms of the original lease and any agreement you reach will have to comply with these terms.
Length of the lease
A longer lease may suit you – for example, if you want to invest in improving the premises or building a retail business – but is less flexible if your needs change and you do not want to stay in the premises. Negotiating rights to assign the lease or sub-let part or all of the property increases your flexibility.
A break clause allows you to get out of the lease early if you wish. Careful negotiation is needed to ensure that any conditions you have to comply with before exercising your right to the break are not too onerous. Particularly, if you want the right to pay apportioned rent for the period during which you exercise the break clause, the lease should say so. Conversely, you should resist any clause allowing the landlord to break the lease early.
The lease will specify what rights you have (for example, to make alterations and to erect signage) and what restrictions there are (for example, what kind of business the premises can be used for). Again, building in flexibility increases the likelihood that the premises will continue to meet your needs.
Although it may be tempting to negotiate as flexible a lease as possible, caution should be exercised. The more flexible a lease is, the higher the level of open market rent you are likely to be required to pay will be.
Maintenance and repair obligations
Your obligations to maintain and repair the premises are a key part of any agreement.
Under a fully repairing and insuring lease, your obligations generally include maintaining the premises in good condition – even if they are not currently. You may want to negotiate for initial work required to put the premises in good condition to be carried out by the landlord, or for the cost to be set against any premium you pay.
Even if your responsibility is limited (eg just internal decoration), you may still bear the costs of other maintenance and repairs through your service charges or contributions to a sinking fund. You should confirm what maintenance and repairs are currently planned, and what the costs are likely to be – you may be able to negotiate for your share of these costs to be capped or excluded from the lease.
Similar considerations apply in terms of ensuring that the premises meet regulatory requirements – for example, complying with building regulations and health and safety regulations, obtaining an energy performance certificate or providing disabled access. And who will pay for energy performance certificates? If you or your landlord may apply for funding for energy-saving improvements under the coalition government’s new ‘Green Deal’, what are the implications for you – for example, in relation to your ongoing energy bills and the marketability of your lease if you want to assign it.
The premium you pay for an existing lease should reflect its value and the costs you face. If premises are in poor condition, you could aim to negotiate a reverse premium (ie where you are paid to take on the lease). For a new lease, you might aim for a zero premium.
The landlord will typically want a deposit – the amount, how long it is held for before being returned to you, and who benefits from any interest are all negotiable. You should avoid giving any personal guarantees.
You will normally be required to pay some or all of your landlord’s legal costs as well as your own. If you are negotiating a sublease or assignment of an existing lease, you may also be required to pay the original landlord’s costs. It should be possible to negotiate a cap on how much you contribute to anyone else’s costs.
The basis on which rent is calculated at rent reviews can have a dramatic impact on future costs. You should resist clauses such as upwards-only rent reviews that the landlord may try to include.
With a new lease, it is often possible to negotiate an initial rent reduction or rent holiday (eg while you are fitting out the premises). Bear in mind that this does not affect the level of rents after the next rent review.
Ensure that you are completely clear about what costs you are likely to pay as part of any service charge and how they are calculated – wherever possible, negotiate for costs to be excluded (eg if you will not benefit from a particular service) or capped.
Unless you are an experienced lease negotiator, you will usually find that your professional advisers can negotiate a better deal than you could. But the more you know about local market conditions (other properties on the market, general demand and market rents) and the landlord’s objectives (eg looking for a quick sale), the stronger your negotiating position will be. Your surveyor should be able to advise you.
A thorough survey of the premises will help identify any faults and potential future problems, and the costs associated with them, so that you can negotiate appropriate reductions in any initial premium, rent and so on.
A landlord is more likely to want to lease premises to tenants who can prove that they are creditworthy and who negotiate in a constructive fashion. Negotiating a lockout period, during which the landlord cannot negotiate with other potential purchasers, can make it easier to reach agreement and avoid unnecessary costs.
Finally, before finalising any lease agreement, you should go through the lease with a specialist legal adviser to ensure it meets your needs and that you fully understand all the liabilities and costs you are committing to.