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Lease Negotiations

There are a few things to consider when negotiating a new lease of a commercial property. This page provides detailed advice on how businesses should approach the acquisition of their new premises, from appointing an agent to undertaking the search to picking up the keys.

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What is a lease?

A lease is a contract between the owner of a property (the landlord), or superior leaseholder, and a tenant. The lease creates a legal interest in the property and permits exclusive occupation for an agreed period of time in exchange for rent.

The lease will also include numerous promises, known as covenants, which must be observed during the lease term. These clauses are either implied or expressly written in every lease.

Careful consideration should be given to each clause agreed with the landlord, as the implications can impact the tenant both practically and financially.

Appointing a tenant representative

Tenants should appoint an agent or tenant representative; an industry professional who will work in their best interests to find the ideal space. Here are some tips to help you find the right tenant representative:

How tenant-focused are they?

The majority of commercial property agency businesses will represent both landlords and tenants. It is unusual for an agent to only represent tenants but such representatives do exist.

Checking that the agent has experience in your particular market is well worthwhile (see requirements and local knowledge).

Can they provide any additional services?

A huge amount of work goes into finding, designing and fitting-out a space to suit a business. Some tenant representatives will be able to assist with some or all of a tenant’s requirements and will work with an in-house design team or have recommendations of contractors, consultants and furniture suppliers.

Requirements and local knowledge

Make sure you give specific details for what you require from your leasehold premises.

Similarly, check that the tenant representative has knowledge of the appropriate sector (offices, industrial, distribution, retail, hospitality etc.) and experience helping similar businesses to yours find space.

Large agency vs small firm

Large agencies may have more resources and data, but a smaller firm with a specific sector or area focus may have more specialist local knowledge.

How do they charge for finding space and negotiating a lease?

Tenant representatives’ fees are generally a percentage of the value of the transaction, the extent of success achieved during negotiations or a combination of the two. However, for small spaces, a fixed fee may be agreed.

A fee of 10% of the average first five years’ rent is not unusual in the current market.

Identifying the property

Essential considerations when choosing a property:

Budget

Establishing what can be spent on occupancy costs and researching just how much money goes into a relocation can be vital, as it provides a financial range within which to negotiate.

The following elements can greatly affect the amount of rent charged, but having a budget cap in mind for your occupancy costs will help to narrow down the options ahead of negotiations.

Location

Location can greatly influence rental levels. For example, good access to main roads for distribution, areas with high footfall for retail and hospitality or proximity to public transport links for offices will all raise asking rent levels at a property.

It is important to have realistic expectations when approaching negotiations if you are looking for property in a prime location.

Size

It is important to think about how you use your current space, whether this could be improved, and how that might impact how much space you require from your next property.

CTA TOP TIP: Landlords often offer small discounts for taking larger space. It is important to bear this in mind during negotiations.

Amenities

Businesses should consider what amenities they require from their space – natural light, large street-frontage, security, 24-hour access, car parking, bike racks etc. and highlight their importance with their tenant representative.

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Property viewings and making offers

Once clear search parameters have been established, prospective tenants will begin the process of viewing properties. This will generally consist of preliminary viewings, incorporating a wide variety of options, before narrowing down to a shortlist of 2-4 properties.

Check that the shortlisted properties can adequately accommodate any future fit-out, as poorly configured floorplates and columns can hinder the ideal workplace design.

Additionally, it is crucial to appoint a consultant to undertake due diligence surveys to provide a full overview of the specifications and condition of expensive mechanical, electrical and plumbing services within the shortlisted properties.

Once satisfied, formal offers can be drafted and agreed with the tenant representative. These will form what’s called the heads of terms for each property negotiation. These detail the key elements agreed between parties ‘subject to contract’, prior to the involvement of solicitors in drafting the lease.

CTA TOP TIP: Offers should be made for at least two properties to avoid any subsequent time pressures derived from unsuccessful negotiations.

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Key areas of negotiation

As negotiations progress, the landlord’s agent will be looking to agree the draft heads of terms. The following represent some of the key terms to be negotiated:

Renewal rights

Statutory rights of renewal under the Landlord and Tenant Act 1954 mean a tenant has a right to renew the lease when it expires, though a landlord may decide to exclude the lease from these protections. A tenant should be notified of this decision at the outset.

It is important not to give up this right without negotiating something in return, as it can be very valuable to the landlord.

For further information, please see the Lease Renewals advice page.

Length of term and break rights

Although it may be possible to agree a shorter lease length on smaller units, landlords will usually attempt to seek a minimum term length that is as long as possible. Longer commitments to a leased property will strengthen the tenant’s negotiating position around rent level and other incentives.

That being said, in longer lease arrangements, landlords may agree to a tenant-only break clause that permits tenants to terminate the lease at a specific point in the term, subject to certain lease obligations being met and sufficient notice being provided.

The position of the break clause will usually be negotiated for a specific point in the lease term. This could be at the conclusion of the fifth year of a ten-year term or on the fifth and tenth years of a fifteen-year term.

Rent and rent review

The initial rent and the frequency of payment should all be negotiated. Any inflexibility from the landlord’s quoting rent may be countered in negotiations with the demand for rent-free incentives or landlord contributions.

In longer leases, where the landlord proposes that the rent is to be subject to review, the tenant needs to agree the proposed frequency and the method of review at the outset, in order to obtain the best advice for these points in the term.

For further information, please see the Rent Reviews advice page.

Rent deposits and guarantees

Rent deposits can vary in size, but often equate to a specific number of months’ rent. During negotiations, it is important to highlight the covenant strength of the tenant, which ultimately informs the landlord that they are reliable and will pay their rent on time. If the covenant strength is great enough, the tenant may not be required to provide a deposit at all.

Moreover, rent deposit agreements should prescribe that landlords hold rent deposits in specific rent deposit bank accounts for the duration of the term.

Service charges, insurance costs and other outgoings

The landlord should highlight the main services included within the property and provide proper estimates of service charge and insurance payments. If in doubt, the tenant is within their rights to request the service charge budgets and actual expenditure from previous years to see a breakdown of the charges.

These costs will usually rise in line with inflation. However, for protection, the tenant can request a service charge cap to prevent this figure rising past an unreasonable point during their lease term. Success in achieving a cap on costs will always depend on the tenant’s negotiating strength.

Where the landlord insures the property, leases should provide that the policy will be on normal market terms and that details of the insurance can be made available to the tenant on reasonable request.

Alienation

Leases should always allow tenants to assign the whole of the premises with the landlord’s consent. Landlords may set out circumstances in which consent can be refused, such as where there are arrears of rents, that are not the subject of a legitimate dispute.

Moreover, if the landlord reasonably requires it, leases may also demand that the assigning tenant utilise an authorised guarantee agreement (AGA) with the incoming tenant.

Leases should also allow tenants to sublet the whole of the premises and may allow subleases of parts of the space if appropriate. These may be granted on different terms to the headlease where appropriate.

If the landlord shows any inflexibility in terms of alienation, then the tenant should counter this with a request for a reduction in rent or some other quid pro quo.

For further information, please see the Disposing of Leasehold Property advice page.

Reinstatement/Dilapidations

If the tenant’s obligations are to be limited to returning the premises to its initial received condition, it is incredibly important to ensure that a schedule of condition is appended to the lease document. This will detail the condition of the property at the start of the lease and will normally need to be agreed by both parties before serving as reference for reinstatement at lease expiry.

This can often be a contentious area between landlord and tenant, where the condition of a property may be perceived differently by each party. A tenant will need to appoint a building surveyor and should budget for this accordingly.

For further information, please see the Dilapidations Negotiations advice page.

Alterations

The tenant should be notified at the outset if the landlord requires a licence for alterations before they can take place. Landlords will always require written details of the works and for the tenant to carry out such works properly and without causing damage or nuisance.

It is not unusual for a landlord to require the premises to be reinstated at the end of the lease, placing an obligation on the tenant to remove any alterations.

The heads of terms should also set out any capital contributions provided by the landlord to benefit the fit-out. This could be negotiated as a single sum, as a figure required per fit-out element (e.g. for floorboxes) or as a figure contributed per sq ft or sqm (e.g. for carpet).

Instructing solicitors

Once the heads of terms have been agreed, both the tenant and landlord will instruct solicitors to begin drafting the lease. However, this also triggers another period of negotiations between parties.

This may simply be highlighting areas of the lease which are not formally discussed when negotiating heads of terms. Often, however, solicitors will highlight specific clauses or areas of unfavourable wording that require challenging before they are formally written into the lease. For example, the wording around the reinstatement/dilapidations liability should remove any ambiguity as to what is expected of the tenant at the end of the lease.

Picking up the keys

Once the lease has been agreed between parties, it is then signed, exchanged and the transaction is completed. At this point, if the parties have agreed for the lease to commence upon completion, the tenant will have the right to occupy the premises from this moment until the lease expires.

It is also from this point that the tenant can mobilise their fit-out contractors and can commence the required fit-out works for their space.

Timing

It is vital to allow sufficient time and internal resources to plan how the whole process will be managed.

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The timeline for negotiating a new lease will vary between different tenants, but it is important for tenants to overestimate how long the process may take, as an insufficient overlap between the leases of the old and new premises may result in serious disruption to business operations.

Thinking about staying put?

If you think you may wish to stay in your current premises instead of relocating, you can find more information here.