What To Think About When Signing A Commercial Property Lease
You’ve seen the retail unit you want, and you’re ‘gung ho’ to sign that commercial property lease agreement and launch your business tomorrow but…. you’re nervous about the potential liability and making a business critical wrong decision.
1. Short-Term Lease For The New Business Or Long-Term Lease For The Established Business:
If you’re in a position to negotiate, a shorter-term lease is highly recommended, particularly when you’re starting a new business. Whether your business takes off or not, a short term lease does not burden you with a long term liability that may come back to bite if the business struggles.
If location is crucial and you don’t want the vulnerability of losing it when the commercial property lease expires, include guaranteed renewal or first option clause.
Of course, if you do really well and need to expand the business quickly then a short-term lease is more beneficial as you will have the option and flexibility to vacate swiftly and rent more spacious premises.
On the other hand if your business struggles and you need to ditch it pdq then you have the same flexibility to wrap it up and not suffer sleepless nights trying to reassign a large liability.
Clearly for a more established business then longer term leases provide the stability required to anchor your position within a certain location. Longer leases also bring the benefit of greater negotiating muscle for better T&Cs.
2. Who Is Responsible For Repair And Maintenance Of The Premises?
Absolutely crucial to any negotiation for an incoming tenant is to be very aware of your obligations and responsibilities under the commercial property lease agreement; such as who is responsible for the repair and maintenance of the premises for the duration of the lease.
It’s all part of the negotiation with the landlord as to who does what, when and where but most agreements will have repair obligations and some of the small detail can have a sting in the tail.
The tenant should always try and negotiate restrictions to their repair obligations and try to avoid having sole responsibility for the repair and maintenance, aiming to share some of the responsibility between landlord and the tenant.
Also, if when vacating the property the tenant is responsible for restoring the property to the same condition at the beginning of the tenancy, make sure you take a full and detailed record of the condition when taking occupancy, in order to avoid costly disputes and disagreements when vacating.
3. Negotiating Rent, Avoiding Hidden Costs
Always be careful of the hidden costs that the landlord or agent might not reveal when signing and you find out about at a later stage. Hidden costs are invariably things like service charges, property insurance and other maintenance obligations. Make sure you understand exactly what and where all the peripheral costs might stack up and include a provision into the agreement that clarifies who bear these other costs.
The landlord will try to impose upward only rent reviews. Again, depending on the balance of power in your negotiation, something to debate and perhaps insist on market rent i.e. the rent could go down, as well as up.
Finally, we’ve focused on the liabilities, exit clauses, conditions. You might want to see what financial cushion you can negotiate at the start. Landlords and agents are very keen to get you to sign that agreement so see what sweeteners, rent free terms you can negotiate when the balance of negotiation is on your side.
Once you’ve signed, the balance of power will have dramatically shifted in the landlords favour.
Commercial property lease can be a confusing and complicated beast.
It’s always advisable to instruct a commercial property solicitor who can walk you through the terms before signing.
Make sure you instruct someone who is a genuine expert and who can take a commercial view, as well as a legal one. You don’t want to instruct a dabbler who applies a microscopic risk analysis to every clause and potentially scares you away from signing what could be a perfectly reasonable agreement.
This article was written by Linkilaw but should not be taken as anything more than generic advice around the subject of Commercial Property Leases. You are advised to seek appropriate legal advice when undertaking any such transaction.
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