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Agreeing clear heads of terms, with a sufficient level of detail is very important from the outset as this will form the basis of any lease on a property you have selected. If you don’t have the knowledge and experience to undertake this task then it is important to employ solicitor to ensure that the terms of the lease that you negotiate are appropriate for your organization now and in the future. Although taking on the service of professionals can be expensive, the ultimate cost in agreeing to inappropriate terms could be very significant for your organization in the future. Heads of Terms will include: -
In the current market Landlords are more willing to accept offers on their unoccupied premises. The reason for this is that every building that stands empty still attracts business rates, service charges and insurance which the landlord is not able to recover through a rent income.
The high number of empty buildings in the current climate gives opportunity for negotiating reduced rent on a new lease or perhaps the opportunity to cap rent when you reach your review your period.
It is also common, when taking on a new lease, especially when conducting building improvements, to negotiate a rent free period. Having a period of reduced or rent free occupation will contribute in some way toward the costs you will incur from improving the property. The amount of rent free period you can negotiate will vary, primarily, on exactly what improvements are intended and how these benefit the Landlord, and on the length of commitment being made to lease the building.
You should also negotiate out that any rent review can take account of building improvements made by your organization. In addition Rent Reviews should be coordinated with Break Clauses (see below) giving you the option to vacate.
When signing a longer term lease, usually 5-years plus, you will have the opportunity to insert break clauses. Careful attention should be given to where these are applied as they provide you with an option to legally vacate.
Use your Business Plan to determine if there are likely situations where, for example, you might out grow the premises and try to coordinate a break clause with these periods to increase your options at that time.
In addition, by coordinating the break clauses at the same time as a Rent Review you will give yourself a stronger position for negotiating any increase in costs, as you will have the option to vacate.
Remember that a Landlord equally has the option to break the lease and this may therefore be as much a disadvantage as an advantage to your organization?
You will almost certainly be expected to pay the legal fees, incurred by the Landlord, in organizing the lease on their building. Paying “the other side’s” fees however is not as common place as assumed and can be negotiated out.
Your organization needs to be flexible in order to respond to changes that may be demanded of it. In order to achieve this it is important to ensure your lease has a provision for subletting and sharing possession. Work hard to minimise the restrictions a Landlord will try to impose. You may need, at some point, to let some of your office space to a partnering organization, or just to reduce your overhead liability. These are options rarely available without thorough negotiation, and are usually only achieved after the lease is in place by way of a License which will incur further legal fees and a probable rent rise. Remember the Landlord can also refuse your request as they will have your commitment to the lease as it stands.
Alienation can incredibly important if a building suddenly becomes completely unsuitable for your organization. Although it will be highly unlikely you can negotiate away the ultimate responsibility for a lease you have committed to, it is possible to agree a right to assign the lease, in whole, to a suitably third party. This may be important if your organization unexpectibly outgrows the building, has to relocate to a new area or needs to simply restructure to a building with different benefits. Although you will remain responsible for the lease to the next break point, or its completion, you can then sell the space to recover your costs and assign the terms of your lease to another entity. This will give you the freedom you may need to relocate your organization to an alternative building prior to any Break Clause or the cessation of your lease. Do remember however to assign the exact terms imposed upon you, such as Break Clauses, Rent Reviews etc. so that your tenant held be held accountable in the same way you will be with the Landlord.
Alterations to the premises are nearly always necessary, if not immediately, at some point during the course of a lease. You should, whatever your intentions, ensure that the Landlord's consent to make alterations, via a License for Alterations, now and in the future, and confirm this before you take up any lease.
The majority of commercial building leases are “fully repairing” as standard, meaning the areas of your possession are entirely your responsibility to maintain and repair, both internally and externally.
In some circumstances a building is used by several organizations and may have common areas that usually combine with the fire routes, access locations and lifts. Such spaces may also encompass the grounds outside and the parking facilities etc. Typically the landlord keeps these areas and the tenants each pay a servicing charge for shared use of them. Ensure you clarify what the cost of the service charge is and exactly what you can expect from the services being applied.
When negotiating the general repair clause for a new building try to negotiate a lesser liability, for example; repairs being limited to the current state of repair at signing the lease. Remember, agreeing the standard “good repair and condition” will require you to put the premises into good repair even if they were in disrepair when you took possession.
A dilapidations clause typically requires you to leave the property in the same condition as the day you took possession. If you do not comply you will be entirely liable, including all costs administering the clause, to return the site to its condition on the day you took possession. Remember that most leases require a substantial cash deposit to be made against them giving the landlord extra leverage at the end of your lease to enforce this clause.
It is absolutely imperative to negotiate that a Schedule of Dilapidations be agreed, with the Landlord, at least 6-months prior to the lease ending, giving sufficient time for you to consider your options when leaving and whilst you still have options for tackling this issue.
It is common place for organizations, that have not planned their exit properly, to simply agree a financial settlement on surrendering possession, but this is never the cheapest option and once the lease has ended you will have no position, legally or otherwise, to negotiate on these costs.
Even if you consider that agreeing a financial settlement poses the least disruption, rather than actually undertaking the reinstatement works, agreeing a settlement before the end of the lease, whilst you still have the option to administer the corrective works if you want, will almost certainly result in a lower cost.
Plan for your exit at the end of your lease so there is adequate time to arrange for a systematic relocation and any dilapidations work that may need to be completed before you surrender possession. Every day of unauthorized possession beyond the agreed term of the lease will result in a financial penalty. Every effort to minimize what this penalty might be should be made when negotiating the lease terms.
This may sound extremely basic but it is imperative that you ensure the landlord is willing for you to use the building for all aspects of your proposed business use. Also bear in mind that over the course of your lease your business model is likely to change, perhaps several times. Try to anticipate all likely scenarios and ensure that all possible operational requirements are clearly stated in the lease.
At Office Changes we have over 12-years experience successfully helping organizations negotiate the best terms on their leases. Initial consultation on such matters is free so why not give us a call? The success of any relocation or refurbishment starts with choosing the right building and agreeing the right lease.
