Getting the most from your commercial lease – Part 1

We talked last time about making the decision on whether to lease or buy your commercial property. Read the blog here if you missed it. If you choose to lease, you need to be aware that the lease is a legal contract. In Part I of a two-part blog, we look at setting the rent, rent reviews and the term of the lease.

What is a lease?

A lease is a legal contract between a tenant and a landlord setting out each party’s rights and legal obligations when it comes to the property in question. Yes, it is a binding legal document and, as such, should not be entered into lightly.

Commercial eases are not always straightforward agreements between an owner and a tenant. Consider the case where an investor owns the freehold of the building and leases it to a tenant. A second tenant may take an assignment of the lease from the original tenant, taking on the original tenant’s rights. That assignee may further lease the building or part of it – in other words sub-let it. So you can see how it can get complicated.

Setting the rent

The expertise of a chartered surveyor, preferably a local expert, is vital in negotiating the rent. He or she knows the specific market conditions at play and any local peculiarities that may give you (tenant or landlord) the upper hand. Tenants may be able to negotiate a rent-free period – again, your chartered surveyor will be able to advise you on whether that would be reasonable. While conditions are improving, commercial rents are still considered to be from 13% (for office space) to 63% (industrial space) behind 2007 levels.

Bargaining power

A tenant’s negotiating power depends on where he or she is in the chain. If a tenant is entering into an agreement directly with a landlord, say, the two parties can negotiate terms. If he or she is sub-letting, they will have to accept the terms already agreed in the original lease, unless they manage to agree changes directly with the freeholder. These amendments are contained in what is called a Deed of Rectification.

With a new lease, your bargaining position really depends on the state of the property market. This is where the advice of your chartered surveyor will be invaluable.

Term of the lease

If you are a tenant and are just starting out in business or going through flux, go for a shorter term commercial lease (say one to two years). In the case of longer leases, there should be provision for rent reviews – typically every three or five years. Rent reviews are a thorny subject – more on that later.

It is important to point out that the tenant will be liable for the rent, rates and other costs included in the contract for the full term of the lease, whether or not they are trading, unless of course they assign the lease to someone else. Be aware that a tenant can only sub-let if there is a provision for it in the original lease.

Rent reviews

New or existing commercial leases will set out the pattern of rent reviews, usually at three- or five-year intervals. Since February 2010, rent can be negotiated down at a rent review. However, if you are sub-letting based a pre-2010 lease you will find that a ‘new’ rent cannot legally go below what is currently being paid regardless of the market conditions at play.

Remember that where your lease began post 2010, your rent could well have been set at an historically low level, so expect your landlord to increase it to what is reflected in the current market at the earliest opportunity – a much more competitive space because of the shortage of new commercial space and recovery-fuelled demand.

Part II of the blog covers security of tenure, repair and upkeep and use of the building. Click here to read it.

We cannot stress how important it is that both tenant and landlord be rigorous about making sure they understand the terms of the lease and their potential ramifications.

O’Neill & Co is at your disposal for the full range of landlord and tenant issues, including advice on leases, landlord and tenant law, specialist rent review advice and negotiation of rent at review, by agreement or arbitration. We specialise in offering strategic advice on the implementation of rent reviews in multi-tenanted buildings and shopping centres.

Don’t hesitate to call us with your question on 045 856604, whether you are a tenant or landlord.