For a business owner, taking on a commercial property can be the start of an exciting new chapter, or perhaps an opportunity for expansion. Finding the right premises is the first step, the next is ensuring that you mitigate the risks associated with entering a new commercial lease.
Here are our top seven tips to consider when taking on a commercial unit:
1. Location, location, location…
When deciding on a unit, first and foremost you should be considering your business needs. Take time to consider the parking facilities, access to transport networks, the availability of any outside space, the new neighbours and any relevant loading restrictions and/or zoning. If you are a business that works outside of the usual 9am-5pm hours, consider the access arrangements for employees through the night (and the impact on any neighbours too!).
Importantly, also remember that footfall leads to sales, so popular surroundings and an attractive local environment will lead to welcome exposure.
2. Do your research…
All commercial leases are designated for a certain type of ‘Permitted Use’ (this is called the usage class). Therefore, you will need to check with the planning authority that your business needs are compatible with the assigned use of the building. If not, you may need to apply for planning permission for ‘change of use’. Not having the right usage class in place can leave you taking on a lease for premises that you can’t operate your business from!
We recommend getting out and about and conducting ‘on the ground’ research of your own. Talking to other business owners and storefront businesses can provide valuable insights on the area and how it is performing. Ask them if they are planning to renew their lease and what benefits and challenges, the location presents. Have a look at the street scene in general; are there any similar businesses already located in the area and how do they seem to be performing. Paying attention to any new stores opening will also provide valuable background information about the vicinity. Major brands opening new stores provide a real vote of confidence and offer a good indicator of increasing prosperity in an area.
When signing on the dotted line, be aware that there is specific legislation in the Landlord & Tenant Act 1954 concerning sub-letting; therefore you need to be sure that the person or company you are renting from is the legal owner of the property. On this note, you also need to confirm which party is responsible for ensuring that the building meets all current access, fire and health and safety regulations.
3. Finding a flexible space…
A flexible property, that can adapt as you grow is important. Whilst a unit may look good for now, think about your vision for the business in the medium and long term – what extra requirements might it have? It may be that a first floor of a unit has the potential to offer additional office and/or storage space, so ask the landlord if there would be an option to rent this later down the line.
4. Long term lease considerations…
Most commercial leases are offered on a 5 year contract. If you think that this will be too long a commitment, see if the Landlord would be happy for you to sign for a shorter time e.g. a 3 year period. If so, just be aware that if a tenant with a shorter lease does take on the property after you, you may well be still held responsible for the dilapidation liability when the 5 years is up (see tip number 5).
Alternatively, you may consider a break clause or rolling break clause, whereby you may agree to pay more rent at the beginning of the contract, but if something unexpected does happen, a reduced notice period (usually 3 months) can to be given.
You may also want to consider having the option to extend your lease, especially if you have spent money on a fit out, so it may be worthwhile having this discussion at the start of the leasing period.
5. Beware your repairing responsibility!
When you have found a feasible unit, it is important to know exactly what repairing responsibility (and therefore cost) you are assuming by entering into the commercial lease. Each lease is bespoke and subject to negotiation between the parties, but typically the tenant will assume the complete repairing and insuring liability for the premises. This includes not only any wants of repair that arise during the tenancy, but also any current wants of repair too.
In our experience, clients are not always aware of their repairing responsibility and have assumed their commercial tenancy is similar to a residential one. In one case, a roof leak had developed over the floor space of a new salon, leading to the closure of the salon and a loss of business for the owner. The owner subsequently discovered that the roof leak was a historic defect, however, as they had just entered in to the lease, it was their repairing responsibility. This proved a costly mistake to make.
So, how can you determine what is likely to be ‘wrong’ with a property?
We recommend that all commercial (and residential) clients have a survey of the property conducted prior to signing the lease. Your chartered surveyor will inspect the property and look to find any possible wants of repair with the building. These repairs can then be costed and used in the lease negotiations. Typically, they can then be used to either negotiate a rent-free period or request they be fixed by the Landlord prior to occupation. Having a commercial survey carried out can more than pay for itself as highlighted in another case study below:
Calsurv were asked to carry out an inspection of a commercial property prior to a business owner taking on the lease. Following our time on site, we reported structural movement to the front façade of the building. As the property was situated in a historic part of London, the repairs necessitated negotiations with English Heritage and the Local Authority. As these defects had been highlighted prior to the lease being signed, all reparation works were carried out by the Landlord, at their cost and time, prior to our client taking occupation. Had this movement been discovered during the course of the tenancy, our client would have been faced with the cost of the works themselves.
When you have received your completed survey, don’t be afraid to challenge a vendor on anything the inspection highlights. This is your job and can offer important weight in the rate negotiations. Things to look out for include the condition of the external walls, roofs and roof structures, the glazing and internal services (such as plumbing, air conditioning, security systems, lift services… etc) and in our experience, penetrating damp in basements is one to watch out for too. All of these elements can become a tenant’s repairing responsibility.
At this point, it is also important to pay attention to the infrastructure that is offered with the unit, especially as many commercial premises are situated within old buildings. Raised floors for sockets, suspended ceilings for cabling, as well as the speed and adaptability of broadband will be important considerations when taking on a lease.
In your survey, your surveyor should also highlight the energy performance certificate of the property being leased. Current standards set out that landlords are unable to grant a new lease of any property with a rating below E. Again, this has implications for the older buildings that are typically let for commercial purposes. You should therefore confirm if any building work is required/planned to make the building fit for purpose as this may cause disruption to you. (Nb. As a sideline note, after March 2023 existing leases of premises rated E or below could load upgrade costs on to unwitting tenants). Remember that units with lower energy ratings, will cost more to heat!
6. Repairs at the end of a lease - Dilapidations…
When you decide to move on to a larger premises, your landlord will expect the property to be handed back to them in the state in which is was handed over to you. But who is to say what state it was in to begin with? Leases will typically contain wording such as ‘the tenant is to keep the property in good and substantive repair’ but this can be widely interpreted. If you took the property on in poor condition and you hand it back in poor condition, then you would fall foul of the lease term. If so, the Landlord could seek monies to bring the property up to ‘good and substantive repair’. However, if you have a record of the state of the property before you took it over and had ensured that the lease stated that you would return it in the same state, you would have no claim to answer.
This recording of the state of the property is referred to as a schedule of condition and is typically prepared by a surveyor. Ideally, a copy of the schedule of condition (which will comprise of photographs and a written record) will be appended to the lease and referred to when the property is returned to the Landlord. This way you are protected from an inflation of your repairing liability.
7. Renovations, fit out and licence to alter…
Typically, a commercial premise will require renovation and fit out works to make it suitable for the business use of the new tenant. As the tenant does not own the property, they must gain the permission of the Landlord to carry out any alterations. This permission process is referred to as a Licence of Alteration.
The Landlord, or their agent, will request plans and schedules of work in support of this licence. The more extensive the alterations and works, the more detail will be required. Ideally, this licence to alter process will take place in tandem with the lease negotiations, as if a new tenant is unable to apply their branding and/or layout to a property, it is unlikely to fulfil their business needs. Tenants should look to take on premises that closely meets their requirements in the first place (especially bearing in mind that ultimately the property will revert back to the Landlord). That said, works to install lighting, environmental controls and fitted furniture are usually unavoidable. Also note that in granting the Licence, the Landlord may insist that the property is returned in the condition it was in when the lease was entered into (see tip 6), so you may be faced with the costs of removing any expensive fit out at the end of the term.
Our advice with fit outs is to keep it clean and simple… let your products do the talking.
- Research, research, research, for the best location
Famously, Jon Hunt spent hours sitting outside many potential office locations observing footfall before opening a new Foxtons agency.
- Inspect and negotiate
Have a survey completed of the premises and use this during the lease negotiations to have repairs made and/or lease free periods granted.
- Get a licence
During the lease negotiations, present your plans for your fit out works and have the licence granted as part of the lease negotiations. Landlords are more likely to say yes to your plans earlier rather than later.
- Get a schedule
Have a record made of the property before you take it on and have this appended to the lease in order to fix your dilapidations liability.
- Fit it out - simply
Keep it clean and simple and let your products do the talking.
We hope that this has been a useful guide for the potential pitfalls of taking on a commercial lease. Having physical property from which to do business, is a hugely exciting prospect and we wish you all the best with driving your business forward. We would love to help and be part of your journey, so please do feel free to get in touch!