Negotiating a lease as tenant

When you rent premises, you are entering into a tenancy. A tenancy can just be a handshake, but it is normally in writing. A tenancy for a short period is often called a ‘tenancy agreement’. When a tenancy is for a year or more, and it is in writing, it is usually called a ‘lease’. A lease can run to 50 pages or more. All leases contain mainly standardized provisions, but they can be worded so as to be ‘landlord friendly’ or ‘tenant friendly’, and our job would be to make sure it is ‘tenant friendly’.

This is what a lease will generally cover -

Tenant. Who is going to take the premises? Be careful about this. Don’t take premises in your personal name if you can at all avoid it. Use a company. If everything goes wrong the company goes bust not you. You can walk away. Companies can be set up for less than £100. If you have a business with several outlets, consider setting up a new company for each letting. That way one bad outlet can’t drag down the rest.

Rent deposit. Especially if you use a new company, the Landlord will want some security that rent will be paid. The estate agents may ask for a personal guarantor. Refuse that – The days when directors guaranteed their companies leases are now history. They will certainly want a rent deposit of at least 3 months rent. They may try asking for anything up to a year’s rent. But unless they have you over a barrel for some reason, 6 months is the most you should agree to.

Premises. The premises will be precisely described, with a plan if necessary. Any rights you need over the rest of the building should be specified (and any rights neighbours need over your premises). For example, in an office building you may need rights to use communal toilet facilites.

Repairs. The lease will say whether you are responsible for maintaining structural parts or only internal parts of the premises. Unless you are taking a whole building for a long term, you would normally expect only to be responsible for repairing and decorating the interior of your premises, not the structure or interior. You need to watch out for provisions saying you have to return the premises in “good and substantial repair” . That means you may have to improve the premises if they are not in that state already. What you should usually do is agree a “schedule of condition”, with photographs, and agree you only have to return the premises in that condition.

Rent. The lease will say how much the annual rent is and when you pay it (usually four times a year). If you are taking a lease for more than 5 years or so, there may be a rent review. Don’t agree to rent reviews more frequently than every 5 years. You should try and negotiate a rent free period to cover fit out costs.

Other costs. The tenant will normally have to pay rates to the Council, and reimburse the landlord for the cost of insuring the premises. If you are in a building with other occupiers you may be required to pay a service charge to cover communal repairing and maintenance costs. But you should be careful in a short lease that you can’t be made to contribute to costs which are really for the benefit of the landlord’s capital value – e.g. replacement of the lift or the roof. You should either have such items excluded, or put a financial limit or ‘cap’ on what you can be asked to pay each year.

Term. The length of the term will be stated. A short term gives you flexibility and a limit on liability – possibly useful for an expanding business. A long term is what you need for a restaurant, sandwich bar or other business where the premises themselves are the business, or a large part of it. You need a long term so you can sell the business on for a lump sum in due course. You can try and have it both ways and negotiate a ‘break clause’. This would allow you to ‘break’ or get out of the lease earlier than the end of the term. It can be worded to be for a particular date, such as the first anniversary of the term, so if you don’t break on that date you have to stay in the lease till the end of the term. Or you may succeed in negotiating a “rolling break” which means you can break at any time by giving notice (normally 6 months)

Use. The lease will specify the use to which the premises can be put (the type of business you can carry on). You would normally want this to be as wide as possible, so you can assign (transfer) the lease on to another tenant with a different business if you need to move on. If the lease says the premises can only be used as a greetings card shop, you are stuck unless you find another greetings card company to take it over. If the lease says the premises can only be used as offices – a nice wide use - you can sell to any office business. You should seek the right to use the premises for any business use which doesn’t need planning permission for the change.

Alterations. Your right to carry out any alterations will be limited. You really need to make sure you can do the things you know you want to do. Normally the lease would say you could do any alterations which are internal or non-structural, provided you get the landlord’s consent first, which cannot be unreasonably withheld. You should certainly seek that much. Often a lease will prohibit structural and external alterations.

Insurance. The landlord will usually undertake to insure the premises. You will reimburse the premium.

Rent suspension. There should be a provision under which the rent is suspended if the premises are damaged so badly you can’t use them (But the rent suspension often has an upper limit of 3 years.)

Right to renew. It will be stated whether the lease gives you the right to renew it at the end (under the Landlord and Tenant Act 1954). This is called security of tenure. Often landlords wish to grant leases “outside the Act” meaning that the tenancy doesn’t get that protection at the end of the term. Then the landlord can make you leave. Actually the point usually is not that the landlord wants you out – he want his premises to be occupied and paying rent – the real point is that he wants to have you over a barrel when he negotiates the new rent.

Other terms. Those are some of the more important practical terms which usually appear in commercial leases. There will be other terms, and other obligations you will be asked to take on.