Tips on taking on your first commercial business premises and lease

by Startacus Admin

Richard Lake is a London based Commercial Property Solicitor specialising in advising startups and SMEs on business property law. Here he offers up some valuable tips on taking on your first commercial business premises and lease.

"Taking your first commercial premises is an important new chapter in your company’s story and a decision that should not be taken lightly. Irrespective of your line of work, your business premises say a lot about your company’s image. This is particularly true of businesses with everyday customer interaction, but importance should still be attached to finding the premises that is right for you and your company, even if you will not have customers visiting.

In this feature we will cover some basic tips on finding your first commercial premises and explain how the process works from start to finish.  It will be assumed that you will be renting your first premises and you are being granted a new Lease.

So, where do you start?

There are a number of ways of finding a new business property but you will invariably have to go through a commercial property agent.  Much like an estate agent would when buying/selling your home, the commercial agent will broker the deal and try to agree terms beneficial to his client i.e. your future Landlord.  Finding the right property is your primary concern but, if you can find it with a trustworthy and reliable agent, the negotiation and legal process will be far smoother and your interests will be better protected.

When a deal has or is close to being struck, the commercial agent will draw up ‘Heads of Terms’.  Think of these as the ‘headlines’ of your tenancy arrangement or property purchase.  You will probably receive a draft for you to approve first.  If you have any concerns then raise them with the agent – there is nothing in the Heads of Terms that is legally binding on either party but, once agreed, it can be very difficult to change them.  

It is possible to find properties without an agent and approach Landlord’s directly but this can be a risky business.  Agents add legitimacy to the process and serve the very valuable purpose of covering the necessary areas of potential dispute.  Poorly drafted Heads of Terms (or no Heads of Terms at all) can also end up costing you more during the legal process because of the uncertainty of your arrangement.  If you do go direct, as a general rule, NEVER transfer any money to a Landlord until you have spoken with a commercial property solicitor.

Key aspects of your agreement…

The key things to look out for when negotiating Heads of Terms on a new lease include;

AGREEING TO PAY THE LANDLORD’S COSTS – it is not uncommon to pay the Landlord’s legal fees but it is by no means the status quo – resist agreeing to this if possible or try and agree a cap.

BREAK CLAUSES – break clauses allow you to terminate the lease early if you wish to leave the property without having to find another tenant to take your place.  There can be Landlord and/or Tenant break clauses so make sure you are clear on who will have the right to break the lease and when.  Break clauses can add flexibility to your tenancy but they can also add uncertainty if the Landlord has the equivalent right.  

ALIENATION – this is a term used to describe your ability to assign (transfer/sell) or sublet (grant a lease of your own) your lease.  Alienation rights are important as they build in flexibility to your tenancy – if your business is going through a tough time, they can provide an invaluable back up plan. The caveat to this flexibility is that the landlord may not agree to the chosen new tenant and, even if he does, you will have to pay his legal fees and will often continue to be financially responsible for the incoming tenant.

RENT REVIEWS – rent reviews are an unfortunate part of most tenancies.  The frequency of the rent reviews throughout your tenancy depends in part on the length of the tenancy that you are undertaking.  Rent Review clauses come in a variety of forms but are usually ‘upwards only’ reviews meaning that your rent will never go down; it will only ever go up or stay the same.  Ideally, you will negotiate as few rent reviews as possible throughout your tenancy or try to agree fixed increases.  If your lease will have one or more reviews of the annual rent, you should bear in mind the financial implications this will have on your business in the future.

RENT DEPOSIT – Landlords will regularly ask for a rent deposit as security for your ability to meet the terms of the Lease.  The deposit that you are required to pay over will depend on the length of your tenancy and how established/successful your business is. It is in your interests to try and negotiate a reduced deposit but expect to pay roughly 3 months’ rent in advance

This is a non-exhaustive list and, if you have any concerns, there can be merit in involving your solicitor at this point in the process.

What next?

Once you have agreed Heads of Terms, it is time to find a commercial property solicitor to take care of the legals on your behalf.  It can be tempting to think that you are capable of looking at the Lease yourself, especially if you are trying to keep a tight rein on costs.  This can be a fatal error though; the cost of employing a solicitor to manage the transaction will be hugely outweighed by the money you will save over the course of your tenancy if that Landlord or his solicitors are playing dirty tricks and you miss it.

There is still negotiation to be done during the preparation and approval of the lease and this is your primary reason for instructing a solicitor.  A good solicitor will be able to identify areas of financial exposure and push back on illegitimate inclusions by the Landlord.  Importantly, Landlord’s love a Tenant that represents themselves (i.e. does not instruct a solicitor) because they know that they can get away with more than they would if they had legal representation.

When looking for a solicitor, it is important to obtain a few quotes from reputable practitioners.  There can be a huge disparity in quotes from different firms so ensure that you are getting the best deal possible and recognise that you generally get what you pay for.  There are practitioners who offer real value for money on their fees but, generally speaking, you should know that ‘cheap’ is not necessarily a good thing.  Expect to pay upwards of £1,200.00 plus VAT and disbursements for a simple transaction.  If you are quoted much less, ensure that you ask all the right questions to make sure you are not being taken for a ride – you generally (but not always) get what you pay for.

Key points to take away:

• Find a property that is right for you but try to go through with a reputable commercial agent

• If you go direct, NEVER hand money over direct to a Landlord without first consulting your solicitor

• Negotiate on Heads of Terms to ensure you get the best possible deal

• Do not think that you can do it yourself - obtain a couple of quotes from reputable solicitors" 

Richard Lake is a Commercial Property Solicitor (and Startacus member) at Hanne & Co Solicitors, Clapham Junction, London.  He specialises in advising startups and SMEs on business property law.  

If like Richard you have some valuable tips and experience to share, please contact iam@startacus.net - we are always happy to hear from seasoned experts! 

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Published on: 17th November 2014