Dobbin & Sullivan are here to provide a brief guide on the terms agreed when taking a new business premises. In order to promote quality and fairness between parties we run through the terms that new tenants should consider as recommended by the Royal Institution of Chartered Surveyors.
We will always recommend tenants and buyers seek professional advice when taking a new premises but for further advice we would recommend visiting the RICS website and access their Code of Leasing Business Premises
‘Heads of terms’ is the document used by property agents to highlight the agreements between the two parties for solicitors to compile the draft lease accurately, quickly and without further need for negotiations. Within this document are several clauses to consider. These should be considered by all parties and the benefit they offer during each letting.
Whilst the terms below are not extensive, the summary of the clauses below provide an insight into what the RICS recommend and hopefully assist with an understanding of the commitments being entered into.
Length of Term, renewal rights & break options
Entering a new lease is a commitment to the agreed terms and therefore any length of lease needs to be seriously considered in line with business plans and proposed uses. We regularly see 5, 10 and 15 year leases being agreed although this can be discussed based on personal preferences.
A lease can be contracted inside the Landlord & Tenant Act 1954 which will provide a tenant a right to renew the lease on newly agreed terms. Contracting the lease outside of the Act will require a tenant to vacate the premises at the end of the lease unless a new lease can be agreed prior to the end date.
Break options provide some flexibility to terminate the lease prior to the agreed end date. This usually requires prior written notice to be served by a solicitor and may have a penalty payment for doing so. All lease obligations must have been adhered to for a break option to be exercised.
Rent deposits & Guarantees
Rent deposits are required to provide security to the landlord and a show commitment by the tenant taking a new lease. These deposits are documented in a separate deed and held within an account owned by the client. There will be provisions to return the deposit at the end of the lease subject to all obligations being adhered to and payments up to date.
An additional option for providing security is a personal guarantee. This is usually offered by someone with a good financial position and effectively provides a guarantee on the rental payments and potentially other obligations of the lease until expiry.
Rent & Rent Reviews
The rent agreement is to be negotiated prior to the terms being agreed and should clearly set out the proposed rental agreement. There should also be an agreed review process if the lease is long enough to factor in potential growth on market rent. Rent reviews can be linked with percentage increases or an independent surveyor is appointed to determine the market rent. Usually time is not of the essence and these clauses allow either party to start the process.
Assignment & Subletting
A lease will have provisions to potentially allow tenants the option to assign their lease. This requires permission from the landlord which cannot be unreasonably withheld but where obligations have not been met or the new proposed tenant is deemed a poor covenant, consent may be refused. In this instance there may be an obligation in the lease to provide an AGA, an Authorised Guarantee Agreement whereby as the assignor, you guarantee the assignee for the duration of the lease or other agreed term.
Assignment of the lease can only be the whole premises. Should part of the premises still be required then some leases may allow subletting of part. If appropriate this would be without security of tenure and at market rent but again, subject to landlord’s consent.
Subletting of the whole premises would be another option to consider. Subletting creates a relationship between the new sub-tenant and you as the tenant. An assignment differs as this involves the relationship with the landlord being passed to the new tenant.
All leases should contain the tenants repairing obligations appropriate to the length of the term. This can be internal only or a full repairing lease depending on the type of property and condition it is leased. A schedule of condition sometimes be agreed between the parties to ensure an accurate report on how the property is taken.
The clauses above provide an insight into what considerations need to be made prior to committing to a new lease. A professional and informed approach is key when negotiating terms along with a clear path for the business and what terms of the lease suit a future path of growth and profitability.
If you are ready to start a new business or seeking to relocate from an existing premises you can search our available property.