When we talk about commercial property, we’re sometimes talking about a commercial lease. So either its creation or its transfer from one party to another.
The creation of a new lease is called a “grant of lease” and a change of ownership of lease is usually called a “transfer or assignment” of the lease.
So, what is a lease?
In essence, a lease is just a contract although it’s a special contract because it will, in most cases, give the tenant (which is the occupier) the right to occupy and use the property. The aim of most commercial leases is to put most of the arising obligations onto the tenant and the landlord is just interested in getting the rent. if you’re not taking legal advice when you are taking on a commercial lease, you could be entering into a very bad bargain and that bad bargain could run for several years
So, I’m usually asked by many small to medium businesses and particularly new businesses – they ask “Why do I need you? I can read the lease and I can read all the title documents and everything else. I can understand it. Surely it’s common sense, is it not?”
If you are thinking of taking on a commercial property and you’ve never done it before, you might want to sit down with your business partners or anyone else involved in the business, or even some friends, and discuss whether – and I suppose the first question is – “Well, can I actually afford to take a commercial lease?” because it is not just the payment of rent. There may well be, in some cases, payment of VAT on the rent. There could be a service charge element on top of the rent. There could be, and in most cases there is, an insurance contribution on top of the rent and then there will be the usual utilities, which is the water rates, sewerage rates, heating, lighting and business rates, and anything else that you may need to pay to use the property for what you want. Don’t forget that maintenance and repair costs can be unexpected.
There will be several heads of clauses in a commercial lease. Each one of those several heads will have their own area of case law which applies to the interpretation of a clause.
So assuming that you can get some of this information beforehand and you havethought about it and you think that you’re happy to proceed, what should you do next?
Now before you involve a lawyer, I would strongly recommend that you get a building survey done from a specialist commercial property surveyor. I also recommend that if you are buying a business, that you get the business valued, and there are specialist surveyors and business valuers which exist out there. So do a ‘web’ search and see who you can find.
So if you’re happy to move forward after the survey has been completed, you might want to agree on some heads of terms via the Landlords agent usually a property agent or broker. Heads of terms is just a summary document, often referred to as HOTS, and common things which are agreed is:
- the amount of starting rent,
- the length of the lease,
- whether you have rights to renew at the end of the lease,
- how much deposit you’re likely to pay,
- any break clauses, which means clauses that allow you to end the lease early,
- what the planning class use of the property will be,
- any rent-free period and rent review mechanisms
- if there are any repairs that the property needs, whether there’s going to be any schedule of condition.
- You may also want to include a provision for the Landlord’s legal costs. Usually, in the absence of agreement, the law states that each party is to pay their own legal costs.
Do note however that this is not an exhaustive list and matters may be a little bit different for your transaction.
Other costs such as paying a premium, which is self-explanatory. Most commercial properties usually do not attract a premium on the grant of a lease, although it does depend on the commercial property. If, for example, you were looking to rent a property in prime retail, for example in Oxford Street, and there are many people vying for the same space, then you may be required to bid and pay a premium to the landlord for granting the lease.
Don’t forget also to factor in stamp duty land tax which has certain thresholds. The calculation is complicated because of lease involvement and in some cases where the rent is higher than a certain amount, there will be a certain amount to pay. So do make sure you are aware of what you may be required to pay upon completion. If your lease is longer than seven years and a day it will require compulsory registration at the Land Registry.
What if the deal is not for me?
Many of you may feel obligated to continue but from a legal stand point the following things should be in your mind;
Heads of terms are not usually binding but aspects of confidentiality and agreement to pay costs may be binding as separate obligations. Noting that most heads of terms will be marked “subject to contract” or “subject to lease”.
Until such time as when the lease is actually completed by exchange, you can walk away from the deal subject to any costs or confidentiality obligations.
If you are requested for a holding deposit, make it clear that if you do not proceed then it should be returned. Holding deposits should ideally only be paid to the Landlords solicitors rather than agents.
So as you can now hopefully see not taking advice is, in my view, a false economy because not understanding exactly what you’re getting could lead to a financial loss and an expensive dispute.
Amit Sharma is a commercial solicitor and director of Solve, The Business Lawyers, providing SMEs and other law firms, business law advice and transactional services. He has been in the sector since 2005 and has worked for well regarded legal 500 law firms.