Your Business Premises: Taking a Lease

Whether you are taking a lease of bigger office space to incorporate your growing team, relocating your factory operations or opening your first retail premises for your new venture, Ward Gethin Archer are here to help every step of the way.

When you have found the premises you want to lease, the next step will be to negotiate the Heads of Terms with the landlord or their agents. The Heads of Terms set out the agreed key terms of the lease; they provide the landlord’s solicitors with the information they need to prepare the lease documentation and for us to make sure that the lease incorporates the terms agreed.

The purpose of this guide is to provide you with some assistance on what to look out for when negotiating the Heads of Terms from a legal perspective.

Term

This will be the length of time for which you will have the premises.

Leases of over 7 years in term will need to be registered at HM Land Registry on completion. We can also advise you on whether you should be applying to register your lease or asking for your lease to be noted on the landlord’s title documents, such as if you are taking a lease of part of the landlord’s land, and you are being granted rights (such as rights of way, rights to use utility services or rights of parking) over land which belongs to the landlord.

Security of Tenure

The default position is that you will have security of tenure – the right to remain in occupation at the end of the lease and the right to serve notice on your landlord requesting a new lease. If terms cannot be agreed between you, there is a process for either party to make an application to the courts for the lease terms to be determined in the absence of agreement between you. Often landlords will seek to exclude this, creating a “non-protected lease”, so that they are free to negotiate terms with you or another party at the end of your lease term.

Permitted Use

What you want to use the property for will be set out in the Heads of Terms. It is important to note that the landlord will expressly state in the lease that they are not providing you with any warranty that the property has planning permission for your proposed use. It is important to establish what Use Class has been granted to the property, either by making enquiries with the local authority direct or by undertaking the local authority search. The local authority search is a search we can arrange for you, and depending on the region, costs around £110 - £200. It will confirm the planning history for the property and detail any issues with enforcement action.

Break Clause

Unless you agree a break clause with the landlord, you will have the lease for the full term and you will not have any automatic rights to bring the lease to an end at an earlier date. This is where break clauses come into play – they give either the landlord, the tenant or both parties (known as a mutual break clause) the right to bring the lease to an end on either a set date in the future or at any stage (known as a rolling break clause). Fixed break clauses are more common, and they are usually agreed for a date linked with the start of the lease (i.e. the break date will often be for a period of years after the start date of the lease).

The arrangements for the break clause are entirely down to negotiation between you and the landlord/landlord’s agents. If you are taking a lease for a significant period of time, you may wish to have several break clauses over the course of the term.

The Code for Leasing Business Premises set out the usual terms and conditions for successfully exercising a tenant’s break clause as:

• Prior written notice to the landlord of the intention to exercise the break clause, given at an agreed period prior to the break date (usually 3-6 months’ notice is required);
• The tenant must have paid all rent due up to the break date;
• The tenant must vacate on the break date, taking all belongings with them; and
• Anyone else in occupation under the terms of your lease (such as someone you have sublet to) must also vacate by the break date.

You should ensure that provisions are included in your break clause for the return of any rent or other monies (such as insurance or service charges) paid by you for the period falling after your break date. It is worth noting that unless your lease states that the rent and any other monies paid in advance should be returned to you, you will not be entitled to the repayment of this.

Failure to comply with these terms will result in your intention to exercise the break clause being defective and the lease will continue (as will your liability for any payments due under the lease (rent, utilities, rates, etc) and maintenance of the property).

Rent, Rent Review and Rent Deposits

Rent

The amount of the annual rent, and the frequency of payments (i.e. monthly or quarterly) will be negotiated between you and the landlord or landlord’s agents. It is important that you are happy with the amount of the rent being charged – if you are not sure whether the value of the rent is fair, you should instruct your own agent to assist with the valuation of the rent.

Rent Reviews

It is common for the rent to be reviewed during the term of the lease, particularly if the lease is for more than three years or so. The rent is usually reviewed on either an open market basis or increased in line with RPI or CPI. The rent reviews will be “upwards only”, meaning that the rent will never decrease from the amount you initially pay (even if the open market valuation decreases in the future). Depending on the term of the lease, there can be multiple rent reviews during the term.

With an open market assessment of the rent, the first stage is for you and the landlord to agree the new rent. If this figure cannot be reached by agreement, the lease will provide for either you or your landlord to refer the matter to an expert who will set the rent. The lease will set out the terms which the expert must consider when calculating the rent (known as the hypothetical lease).

Index-linked rent reviews will be calculated on the basis of the increase to the “all items” figure of the Index of the Retail or Consumer Prices. With rent reviews on this basis, there is often a “cap and collar” agreeing the minimum and maximum percentages which the rent will increase on the rent review/s.

If the rent increases during the first five years of the term, you may need to make a further Stamp Duty Land Tax Return and pay any Stamp Duty Land Tax due on the increased rent figure. This is something we can assist you with.

Rent Deposits

Landlords will often ask for a rent deposit, usually linked with the rental payments, such as a rent deposit of three months’ rent. This money can be used in the event that you default on rental payments or any other monies due to the landlord, or to pay for works to be carried out to the property which you are responsible for (such as maintenance). You will be required to “top up” the rent deposit if the landlord makes a deduction from it.

We will assist you with the rent deposit deed, the legal documentation setting out the terms on which the landlord is to hold the deposit and when it is to be returned to you.

Sometimes, the rent deposit or part of it will be returned to you after you have been able to demonstrate that you are turning a profit or have acquired assets in excess of the annual rent payment (usually by two or three times). This is something you or your agent should negotiate as part of the deal if you want the rent deposit (or some of it) to be returned to you during the term. If no early release is agreed, the usual arrangements are for the rent deposit to be returned to you at a few months after the end of the term (or a few months after the lease has been taken over by a new tenant, if you are able to assign/transfer the lease).

The condition of the premises and your obligations

If you are taking a lease of a whole building or unit, you are likely to be taking a Full Repairing and Insuring Lease (also known as an FRI Lease). This means that:

• You will be obliged to keep all the property in a good state of repair and condition. This includes all external and structural elements such as the roof; and
• The landlord will insure the property, and you will reimburse them for the cost of the insurance

If your building is not in a good state of repair and condition when you take the lease, this could create an obligation on you to put the property into a better condition at the end of the lease than it was in when you took the property on. If this is the case, we would recommend that you insist that there is a photographic schedule of condition, which will be annexed to the lease, to record the current condition of the property. This can be referred back to at the end of the term in the event that there is a dispute over the condition of the property. Your liability will be limited to returning the property to the landlord in the condition it was in at the start of the lease.

If you are taking a lease of part of a building, your obligations are likely to be limited to keeping the internal parts of your property in good repair. Our comments about a photographic schedule of condition apply to this too. Your landlord will insure the building and maintain the common and external parts of the property, and you will pay the landlord for a share of the insurance costs and a share of the maintenance costs (known as a service charge). Enquiries should be made to establish how your share of the insurance costs and service charge are calculated, and to make sure that you are comfortable with your financial obligations in this regard and when payment of the service charge is due.

We would recommend undertaking a survey of the property prior to taking the lease to make sure that you are happy with the condition of the building, and that there is nothing costly which it may fall to you to repair or replace.

Outgoings

In addition to the rent, insurance costs and service charge (where applicable), you will be responsible for all utilities used at the property and the business rates. Sometimes, the landlord will receive the utilities bill for the building and charge you for a proportion of those fees – again, it should be established how this is being calculated to make sure this is fair to you.

Fitting out works

If you want to do any works to the property, you will need your landlord’s consent. If you know that you will need to do certain works in order to use the premises, then this should be agreed from the outset. You will also need your landlord’s consent to any signage you wish to display at the property. By agreeing the works which will be undertaken from the outset, we can deal with recording the landlord’s consent to those works as part of the lease transaction. The legal documentation for this is the Licence for Alterations.

You may wish to negotiate a rent-free period with the landlord to cover the period of time which you will be undertaking the works and not trading.

If you need to get planning permission for any works to the property, or to use the property for your intended purpose, you may wish to put in place an agreement that you will take the lease when that planning permission is granted. This is done in an Agreement for Lease – a contract between you and the landlord confirming that when the planning permission is granted, you will take the lease (and the lease will be in an agreed form). This Agreement for Lease will prevent that landlord from letting the property to another tenant whilst you wait for the planning permission, and also gives the landlord the certainty that you will take the lease when the planning permission is granted.

Assignment / Subletting

If you want the ability to exit the lease outside a break date, or the option to sell your business and the new owner take over your lease, you should agree with the landlord that you will have the ability to assign the lease. This will give you the ability, subject to the landlord’s consent, to transfer the lease to a new party. In most cases, when assigning the lease, you will be required to stand as a guarantor for the new tenant. The landlord may also request another guarantor for the tenant (such as a director if the tenant is a company) or a rent deposit.

Subject to you being able to assign the lease, whilst the landlord’s consent will be required, this is on the basis that the landlord cannot delay or withhold their consent. If the proposed tenant has financial references or a trading history indicating that they can pay the rent, it would be unreasonable for the landlord to refuse to agree to the assignment.

The other option to “get out” of the lease would be to sublet. Again, this should be negotiated at the Heads of Terms stage to establish if the landlord will agree to you having the ability to sublet, subject to their consent (not to be unreasonable withheld or delayed). If agreed, the lease will set out the terms which must be incorporated into the sublease. You will then stand as the landlord to your tenant (but you will still be required to pay the annual rent to your landlord).

If you are taking a lease of multiple units or floors of a building, you may also want to discuss with the landlord whether you can assign or sublet parts of the building.

You should also discuss any arrangements you may need to share use or occupation of the property with your landlord at this stage. For example, if you are running a hairdressing or beauty business, will you need people to be able to rent a chair or room from you? Will you be selling any concessions or allowing anyone to have pop-up shops alongside your retail business? Getting these things agreed at an early stage will prevent issues arising.

If your landlord agrees, you may also be able to share occupation with a group company, provided that you are not granting them a lease, giving them exclusive use of a particular part of the building or charging rent.

How we can assist you

Whilst the Heads of Terms are not legally binding on the parties, they do set out the key agreed terms for the lease and matters can become protracted and costly when you are trying to move away from the agreed terms during the course of agreement of the lease documentation. We would be happy to assist you with our comments on the legal implications of the proposed Heads of Terms, which in turn will enable you to negotiate the proposed terms with your landlord or their agents.

Once the Heads of Terms are agreed, we would be happy to act for you in the legal process moving forward. To discuss how we can assist, what the legal process entails, and the likely costs for your transaction, please do not hesitate to get in contact with the Commercial Property Team.

Laura Leventhall is a solicitor in our Commercial Department and is based out our offices at 10 Tuesday Market Place, King’s Lynn. Laura assists our clients with commercial property, company law and business matters. If you have any questions regarding this article, or would like any assistance with your business matters, please contact Laura on 01553 667246 or at laura.leventhall@wga.co.uk