Are you a first-time commercial tenant

By Daniel Clarke, Birkett Long
If you are taking on your first commercial property as a tenant it can be quite daunting, especially when trying to negotiate the Heads of Terms with a seasoned landlord.

Published in Suffolk Director Magazine, Autumn 2021
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Legal: Birkett Long

To help put you in a good position, once you have found your ideal property, the main terms we advise you focus on are:  

Annual rent

The strength of the market will dictate your bargaining power and although it is always worth attempting, there is usually not much room to negotiate the rent down. Instead, you may be able to negotiate an initial rent-free period of a month or two.

Length of lease

The average initial term is normally five years, after which you should be free to gauge your growth and decide on whether you need to move to larger premises, or if you are content and established where you are.

Whilst negotiating the length of the lease term, you need to bear the following in mind:

  • You need a break clause.

This allows you, and sometimes the landlord, the freedom to terminate the lease before the full lease term has come to an end. If negotiated correctly, you should try to have a break clause every three years, or longer for terms of 15 years and above.

  • You can assign the lease.

If you cannot negotiate a break clause, then you should have the ability to assign the lease to another party. There are usually two types of assignment provisions, either there is a complete ban on assigning the lease, which is legal, or you can assign with the landlord’s consent (which is not to be unreasonably withheld).

  • The lease has renewal protection under the Landlord and Tenant Act 1954 (the “1954 Act”).

Unlike residential tenancies, commercial leases of this type have an automatic protection under statute to be renewed at the end of their term. This is generically referred to as protection under the “1954 Act”. This way, you can remain in an established location and keep the goodwill you have gained over the years.

Rent deposit

As a fledgling business, with no financial history, the landlord may insist on a rent deposit, or for you to personally guarantee the tenant’s obligations under the lease, or both; the latter is usually for newly incorporated limited companies.

The rental deposit will be kept in a “deposit account” held by a third party on behalf of you and the landlord, and will remain your money throughout, unless you default on an obligation under the lease. The landlord can deduct any default monies from the deposit account. If this occurs, you will usually be in breach of the lease if you do not “top up” the deposit back to the agreed amount.

If you are daunted by what to do and want some legal advice and guidance on taking on a commercial tenancy, then please get in touch.

 

Daniel Clarke is a Chartered Legal Executive at Birkett Long LLP
T: 01245 453807 E: daniel.clarke@birkettlong.co.uk
or visit: birkettlong.co.uk

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