We can help you with the sale, purchase and lease of commercial property.
There are many issues to consider when thinking of acquiring commercial property. Although you can buy it, many businesses prefer to lease. We set out below some of the points you need to consider:
A Guide To Leasehold Business Premises
What is leasehold property?
Leasehold property is land held under a lease for a specific period e.g. five years.
You pay an annual rent which, depending on the length of the lease, may be subject to review.
At the end of the lease (see 11 below) you return the property to the landlord.
A lease sets out what your and the landlord’s respective rights and obligations are.
Buying or taking a grant of a lease
When buying or starting up a business, you will normally either buy a lease as part of the business you are acquiring or you may take a new lease direct from a landlord. This is normally referred to as the landlord granting a lease.
Questions to ask include:
1. How long does the lease have to run?
If you’re buying an existing lease, check how many years it still has to run. its length will often be calculated from a different date to that which appears on the front page. If you’re taking the grant of a new lease, again, how long is it for?
What will happen when it expires? The landlord may not want to grant a new lease or may demand a rent greater than you can afford. Does the lease exclude the protection of Part II of the Landlord and Tenant Act 1954? (see 11 below).
2. What is the current rent? Is it likely to go up?
Under the terms of most leases, rent is liable for review every three to five years. It’s important to check when it was last reviewed. You don’t want to find, six months after you move in, that your rent is due for review. In view of the length of time between reviews your landlord could be looking for a substantial increase. Remember, rents normally only ever go up, they rarely come down! If you are taking the grant of a new lease, check how often your rent will be reviewed.
3. Who is responsible for keeping the property in repair?
Normally it’s YOU so check what your repairing obligations are. If your lease is only for a short period, beware of clauses which make you responsible for structural repairs. If you’ll have a lease for only a short period, you don’t want to have to spend £20,000 on a new roof.
If you’re not responsible for repairs, who is? You will still have to pay the rent notwithstanding the premises become unusable due to a hole in the roof so it’s important that someone, probably the landlord, is responsible. Premises can be in a poor state when you take them over. In this case, check whether the landlord is expecting you to put the premises into a good state of repair. If the lease only has a short time to run does the landlord plan to serve a ‘schedule of dilapidations’- a list of the repairs he expects you to make – before he takes the premises back?
If you are taking a lease of only part of a building, who is responsible for the repair of the rest of it? If it is not kept in good repair, it could impact you so it’s important to think about the condition of guttering, down pipes and other rain water goods.
4. What is a ‘service charge?’
You may move into premises that form part of a larger building. If so, the landlord might retain liability to repair the structure of the building. In such circumstances you could be obliged to contribute towards the cost of this – a charge known as a ‘service charge’. If so, make sure you consider the state of repair of the building, not just the part you are acquiring. If your lease is only for a short period of time, make sure you don’t become liable to pay towards major repairs you won’t benefit from. A replacement roof on premises can last 20 years. If your lease is for 10 years or less, should you be making a full contribution to this? For any lease of five years or under we recommend you agree a cap on service charge contributions so that you are not liable to pay towards any major capital works such as a new roof.
5. Are you looking to change the use of the premises?
If you buy a hairdressers but want to open a chip shop, then you need the landlord’s permission to change the use. He is is normally not obliged to give you this. (You may also need planning permission which we will discuss below.)
Be careful that the use clause in your lease is not too narrowly drawn. For instance, if your lease states the property can only be used for the sale of tropical fish, that means you can only sell the premises to someone who wants to sell tropical fish. That may be OK if you are disposing of your business as a going concern, but if you just want to dispose of the premises, it limits its attractiveness to potential purchasers.
6. Do you want to carry out building works? Whose consent would you need?
You need the landlord’s consent – and you may also need planning permission. If any structural work is necessary you will need building regulation consent. Show the plans and specifications of what you want to do to the landlord as soon as you can. Remember, he is under no obligation to agree.
7. If you want to put a new shop front and sign whose permission do you need?
A new shop front is classed as ‘building works,’ see 6 above. You will also need the landlord’s consent on the size and design of any external signage. Depending on the kind of sign, you may also need planning permission.
8. Do you need the landlord’s consent before buying the property?
Unless you are dealing directly with the landlord (see 10 below) you will have to secure his written consent before taking on a lease from the existing tenant. Even if money is not being paid for the lease you still need the landlord’s written permission to take the lease over. Purchasing a lease or even occupying the premises without the landlord’s consent can result in the lease being forfeited. If you go into possession before you have consent, you do so at your peril!
Before giving his consent the landlord will need to be satisfied that you can meet the rent and other liabilities under the lease. You need to be able to produce a bank reference and two other professional/trade references which should confirm that:
• You can pay the rent
• You will be a good tenant
• You will be able to discharge any other liabilities under the lease
If you can’t produce these, you may have problems getting the landlord’s consent.
If so, you could consider asking a third party who can produce such references to stand as a guarantor or agree to enter into a rent deposit
9. What is a ‘rent deposit?’
This is where you deposit between three and six months rent (sometimes more) with your landlord as security against you not being able to pay the rent or committing other breaches of the lease. You should consider carefully the basis upon which this sum is returnable to you.
10. What should you do if the landlord is not the freeholder?
When dealing with a landlord, you should check whether or not he owns the freehold or just has a lease himself. If he only has a lease then he may need the consent of his landlord (this person is known as the superior landlord) before he can grant a lease to you, or consent to you taking over a lease from the current tenant. If this is not obtained then the superior landlord can take proceedings to have your lease terminated.
11. What happens when your lease comes to an end?(Part II of the Landlord and Tenant Act 1954)
All leases of business premises for more than six months are entitled to the protection of this Act, unless an agreement, which follows the statutory procedure, has been made specifically excluding its protection. With certain exceptions, the Act gives you a right to a new lease when your existing one expires. The protection of the Act can be very important when it comes to discussing rent and other terms in your new lease. If it would be difficult to relocate your business then 54 Act protection can be important.
12. When do you need Planning Permission?
The fact that premises are being used for a particular purpose or that a landlord agrees to grant you a lease to use premises for a particular purpose does not mean that such use is actually lawful. Valid planning permission must exist for any use to which premises are put. If it doesn’t, you can be prosecuted by the local authority so this is something to check.
13. Do you have to pay your landlord’s legal fees?
No. This is a matter for negotiation. The outgoing tenant should normally pick up the landlord’s legal fees.
14. Should you have a survey?
Yes, yes, and yes again! Repairs are expensive. Your survey will tell you what you are letting yourself in for. A surveyor can also advise you whether or not the rent you are going to pay is reasonable. You should also ask the surveyor to advise you on whether the building complies with all necessary statutory requirements in particular Disability Discrimination legislation and current fire requirements. Compliance with both can be expensive.
15. Do the premises have gas, water and electricity?
Don’t take this for granted. Check which services are connected or ask your surveyor to check. Make sure they are in working order. Are the drains working? What rights do you have to use any communal toilets in the building?
16. What else should I be thinking about? What about Parking, delivery, access, fire escapes?
Check whether you have the right to park a car or whether it’s first come, first served. If your lease doesn’t guarantee you a parking space, you’ll need to think about where you’ll park if all the spaces are taken. Without a specific right in the lease you won’t have a guaranteed right to park.
Can you park a delivery van outside the premises or is it about to become a red route? Your local search should tell you
There may be an access road leading to the back of your premises but are you entitled to use it? Your lease will tell you.
How do people escape from your premises in the event of an emergency? A fire escape may exist but do you need permission to use it? Check your lease!
17. Getting it right
When you’re starting up in business, renting premises to trade from will be one of your biggest overheads. With a little planning, you can save yourself a lot of problems!