Let’s face it. For most occupiers, negotiating the legal clauses in a commercial lease can be a bit daunting. It’s probably not familiar territory and you’d rather spend the time focusing on your business. We’ve pulled together some top tips to help you avoid the legal pitfalls in commercial real estate:
Read the small print
The demands and expectations of occupiers are often very different from those of their landlords, who are more often property savvy. From the outset, it’s important to be very clear about the liabilities and obligations contained within your lease.
In all the excitement and buzz of finding new premises, it’s easy to forget about specific lease clauses and how they impact on your occupation of the space. Do you need landlord consent for structural changes? When do I need to serve my break notice? Do I need to maintain the premises externally? Paying careful attention to your obligations in the lease can save you a fortune further down the line.
Some landlords prefer to leave the language in their lease agreement vague so that there is a chance that they will win an argument based on the uncertainty of the wording in the future. Are you prepared to take that gamble, or would you rather know about the outcome before it happens?
Whilst you can’t account for every eventuality in a lease, it’s important to avoid loose clauses which could be open to interpretation. It might cost you more time now, but at least you know where you stand further down the line.
It is easy to agree terms because they are what everyone else agrees to and what is considered “industry standard”. Obviously, there are clauses which are designed to be standard, such as service charges in multi-let buildings. Most occupiers would understand why these need to be fixed. But most of the other clauses are up for grabs.
Quarterly rents are old hat. Who wants to tie up cash three months in advance in this day and age? Try asking for monthly rents. That is just one example. The point is, do not be deterred by the argument put forward by the landlord’s lawyer that the clause you don’t like is “standard”.
Build in flexibility
Business can move fast and even though an occupier might know what they want at the start of the lease, it is quite common for requirements to change within a very small timeframe. Company mergers or acquisitions, new contract wins or even changes in legislation can all have an impact on the space you occupy. It is useful to try to have as much flexibility as possible, so you can adjust your space requirements to suit the needs of your business.
A break clause is a good example of how a tenant may have flexibility for the future, allowing the tenant the comfort of knowing he can leave earlier if he wishes. But be careful, break clauses in leases are littered with traps designed to deny the tenant the break they’ve asked for – falling foul of these can be catastrophic for your business.
End of lease obligations
Occupiers usually don’t think too much about their end of lease obligations and liabilities before they sign a contract. Unfortunately, dilapidation disputes are very common in commercial property and can ultimately end up in court. You should familiarise yourself with the lease terms and their implications and take steps to minimise your exposure to dilapidation claims by the landlord.
It is important that tenants consider their potential future dilapidations liability in good time, and budget for that future obligation. Provision made in advance, may be allowable against future taxes. If you undertake alteration works to the premises then it is likely that your landlord may require you to reinstate those alterations shortly before the end of the lease (regardless of whether you see them as a benefit). A Licence for Alterations (or Licence to Alter) can be agreed which sets out the obligation.
Leases are complex documents with many hidden traps but, with some good advice and careful planning, you can limit your exposure and liabilities. To learn more about anything discussed in this article, email [email protected] or call us on 0141 354 8962