Questions when leasing commercial property

Questions to ask when leasing a commercial property

Crombie Wilkinson Solicitors Commercial Property team have put together a list of questions to ask when leasing a commercial property. For legal advice when you are looking to lease or update a lease on a commercial property, contact a member of our Commercial Property team. We have offices in York, Selby, Malton and Pickering.

1. Is the property in a suitable location?

The location of the property is important and linked to the commercial nature of the business you wish to carry out. We work closely with a number of Local Agents who are able to assist with any queries you may have in this regard.

2. Does the use of the property suit your commercial needs?

It might be the case that the current use of the premises is different to the purpose for which you propose to use the premises. In this case, you will need to consider the amount of work involved in fitting out the property to make it fit for purpose and the costs involved. More importantly, in some circumstances changing the use of the property may result in an obligation to obtain planning permission, and in any case where works are required to the property, building regulations will be required.  

It therefore may be more commercially sensible to check that the premises currently falls under the use you require to carry out your business, as this will circumvent any obligation for planning permission and the additional costs involved with carrying out any extensive works to the property. Determining the current use of a property is one of the key parts of the due diligence process which we carry out when taking a lease, and we can advise you of any risks which our enquiries present in this respect.

3. When does rent fall due and how much?

Most commercial rents are paid on the usual quarter days but you will need to consider whether this is appropriate for you and your business. For example, it may be more suitable for you to pay rent on a monthly basis. This will be a matter for negotiation with the landlord, and we are able to assist with any such negotiations.

Similarly, the amount of rent is determined by your negotiations with the landlord. However, there may be other issues relating to rent for you to bear in mind. For example, do you need to request a rent free period? Is rent being charged at an initial rate with it set to increase after a certain length of time? Is the landlord proposing to charge insurance rent? We are happy to assist with these questions and negotiations and it is often worth contacting us at an early stage (e.g. before an offer is accepted by a landlord) so that we can help with these negotiations.

4. Are there any restrictions on assigning or subletting the property?

You may wish to vacate the premises prior to the term ending for many commercial reasons and it is often desirable for this to be done via an assignment (i.e. transferring the lease to a new tenant) or subletting (i.e. letting all or part of the property to a third party who would therefore become your own tenant). Deciding whether to assign or sublet depends on the extent of which you wish to dispose of your obligations and it is advised that you discuss both options with your solicitor, as well as your accountant (since the rental income obtained from subletting could create tax implications).

An assignment of the lease will enable you to essentially transfer the lease to a new incoming tenant who will then become liable for the obligations under the lease. In most commercial leases, you (as the outgoing tenant) may be required to enter into an ‘Authorised Guarantee Agreement’ or ‘AGA’. This is an agreement between you and the landlord to say that, should the new tenant fail to abide by the terms of the lease (including failing to pay the rent), the landlord can seek a remedy from you. In some circumstances you could even be required to take a new lease of the property in the event that the assigned lease is forfeited. It is therefore important to carefully consider the terms of the lease, and in particular to check whether the landlord has imposed any additional provisions for assignment (such as entering into the above agreement or paying an assignment fee). Such matters often feel less important when entering into a new lease, but can present major problems further down the line when you wish to assign, so it is important to negotiate at the start when you are in a better position to do so.

For more information on assignment and subletting, please see our alienation section in our blog “Guide to Signing a Commercial Lease.”

5. Is there a service charge payable?

Service charges are most common when you are looking to take a lease of a building or estate where there are other occupiers of the building or other tenants on the estate. In this situation, the landlord will provide services such as repairing and cleaning the parts of the building or estate that all tenants will have the benefit of using, such as roads, paths or bin areas (often referred to as ‘Common Parts’). Landlords will then pass the costs of providing these services back to the tenant through a service charge.

It is important that you are aware of what services are being provided, as well as having a clear understanding as to how your proportion of the costs will be calculated. Again, this is a key part of our enquiries when acting for you on a leasehold transaction.

6. What is the length of the lease and when does it expire?

It is important to consider the length of time that you may require use of the premises. Are you looking to lease a property on a short term basis or do you require the property for a considerable length of time? This will depend on a number of factors such as whether you are just starting up or whether you are well established and are looking to expand.

7. Is the lease protected by the Landlord and Tenant Act 1954?

As a tenant of commercial premises, this legislation gives the tenant an automatic renewal at the end of the term, except in certain limited circumstances (e.g. if the landlord intends to sell/redevelop the property).

Most landlords will seek to exclude the security of tenure provisions in the legislation, to ensure that the lease will actually come to an end on the termination date.

It is important to review the Heads of Terms and establish the position as you and your solicitor may be able to negotiate a lease which is protected by the legislation.

For more information regarding the Landlord and Tenant Act 1954, please see our blog “Do commercial tenants have rights?

8. Is there a break option?

It may be desirable for you to have the option to terminate the lease should you wish to move premises earlier than the expiry date of the lease. Having a break option in the lease provides flexibility for your business should the demands for your business in the area change, and therefore it is worth discussing directly with the landlord or through your solicitor as to whether a break clause is required.

It is important to bear in mind however, that the landlord may also wish to include a break option which can be exercised by either the tenant or landlord. In these circumstances, a landlord or tenant who exercises the break option will be required to serve a notice on the other party within a set period of time. Therefore, you will need to give careful consideration to an option to break and which type will be suitable in the circumstances.

9. What rights does the lease grant and what rights are reserved by the Landlord?

Standard commercial leases include rights which are granted to the tenant for their benefit, as well as rights which are retained by the landlord. It is important to consider the rights given to you under the lease and ensure that they include any additional benefits needed for you to use the premises effectively. Do you require a right to park a certain number of vehicles at the property or a right to use a storage area or refuse bin? Does the lease permit you a right of way over any shared areas if the premises form part of an estate or shared building? These questions will help you establish just how suitable the premises are for your business purposes.

10. Is there a provision for Rent Review?

As briefly mentioned above, it is important to consider the possibility that the annual rent may increase after a certain period of time.

Many landlords will seek to impose a rent review clause, which provides for the rent to be reviewed at certain specified dates, in accordance with the terms of the lease. Often, such a clause will provide for the rent review to be ‘upwards-only’ which means that, whilst the rent may stay the same, it will never be reduced, even if there is a significant change in market rent values.

The types of rent review can vary with the most common rent review being open market review. However, there are other possible types of rent review such as index linked or stepped rent reviews.

It is therefore important to consider the terms of the rent review provisions to ensure you are aware of when the review(s) are due to take place, and to determine what type of rent review is in place.

Review provisions will be important not only in forecasting your future business expenditure, but also in the event that you assign the lease, as any incoming tenant will want to have a clear understanding of their rent obligations. Again, we appreciate this is an area of key importance to tenants and it is something which is given very thorough consideration with you, to ensure you are fully aware of your obligations, both now and in the future.

11. Are there any obligations on you to repair the property?

You and your solicitor will need to ensure that the provisions relating to repair are not unduly onerous. The obligations for repair in most commercial leases require you to keep the property in good repair. However, you should be cautious where a lease requires you to ‘put’ the property in good repair, as this places an obligation to you to repair any damage that is already at the property when you take the lease. In some circumstances, you may be able to negotiate that your repairing obligations under the lease are by reference to a schedule of condition which shows the state of the property at the date when you took the lease. We can assist with negotiations in this regard, as well as referring you to third parties with the appropriate expertise to prepare such a schedule.

12. What are my obligations when the lease comes to an end?

Does the lease require you to remove any fixtures or alterations made to the property once the tenancy comes to an end? Are you required to decorate the property and does this have to be done to the landlord’s satisfaction? Are you required to return the property in a state of good repair?

If you have used a schedule of condition, this may be helpful as you approach the expiry of the lease to ensure that you are returning the property in the condition it was initially leased.

There are many considerations when taking a commercial lease and it is important that you seek legal advice to address any questions or concerns you may have. Our commercial property team will be able to review your proposed lease, and provide advice on all of its terms to ensure that it is negotiated on the best possible terms. If you would like any further advice on this topic, please feel free to contact us