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How to Decide on a Commercial Lease for Premises

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Whether you need a shop front or an office, a commercial lease on premises is one of the biggest commitments that you can make when starting a business. Unlike residential letting,  there is more money at stake, over a longer timeframe, so take steps to make sure you don’t get burdened with a property that it unsuitable for your needs.

The best thing you can do is to take legal and tax advice. Have a lawyer specialising in commercial property go over the lease before you sign anything. Contracts can be full of clauses, sub-clauses and riders that don’t appear in residential property contracts so it makes sense to have an expert go over the details. In addition, some territories actually levy specific taxes on commercial leases, which could have implications for your cash flow.

When you’ve found a property that seems right for your business, make sure that it is suitable for purpose. Not only should the local authority have zoned it for the purpose you wish, but so should the landlord. Go over any restrictions on the use of the premises, including signage and alterations you may wish to make, and check to make sure that none of them impact on how you are going to do business. If anything seems vague, ask for clarification and ensure that it is written into the lease agreement so you are legally protected if it becomes a point of dispute further down the road.

When deciding on a lease period, especially for new businesses, anything longer than three years is generally too long. You may need to move to larger premises once your business is established, the building may not be as conveniently located as you wish, or – heaven forbid – it may actually fail. If this is the case, you don’t want to have ongoing obligations to a property you no longer use, especially as if you wind up your business, you may be personally liable to keep up payments until the end of the lease period.

It’s generally only large, long-established companies that can afford to sign leases for extended periods, but even small businesses can use some of their tricks to try to minimise the potential costs. See if the landlord would be willing to offer a rent-free period for a couple of months, so that you can assess the suitability of the premises for your purposes. If my local high street is anything to go by, landlords would be happier to have a guaranteed tenant who gets a three months free than have no tenant at all. Also, see if you can negotiate to pay the rent on the property monthly, rather than the more usual quarterly payment period. This will make the payments more manageable, especially when predicting cash flow.

Something else that could be vitally useful in ensuring you don’t get stung is a break clause in your contract. This benefits both yourself and the landlord, stating that after a certain period of time, either one of you is allowed to bring the lease to an end early, provided adequate notice is given. After this period the lease will continue as agreed, but it does provide a useful escape route if the property doesn’t turn out to be all you wished for. Without a break clause, you could end up paying for the property long after it has ceased to be of use to you. At best, you could sublet (provided this is permitted); at worst, you will be paying unnecessary rent and bills.

Bear in mind that in addition to paying rent, you will probably also be responsible for paying utitilities and business taxes on the premises.  In addition, you may also have to pay the landlord an additional service charge for the upkeep of common areas in larger buildings. Once again, make sure that all your obligations are down in writing, and see if you can get the service charge capped so that you don’t get hit with the bill for major repairs. While you may be expected to keep the premises serviceable, it is important to know what your responsibilities actually are. In older buildings, make a note of any repairs that need to be made before you actually take the lease on, so that you don’t get blamed for them at a later date. Taking pictures of the state of the property before you move in is always useful, especially if you end up in a dispute.

Reach a written agreement on how faults in the building will be reported, and how they will be fixed. If you are given free rein to fix them yourself, make sure there is a procedure for having your expenses reimbursed by the landlord. If the landlord is responsible, there should be a time frame within which faults can be expected to be fixed. You don’t want to be running a bistro with a leaky tap, especially as you’re the one responsible for the water bills.

Finally, you also need to pay attention to the end of your lease. If everything works out and the premises suit your purposes, you won’t want to be forced to move, so see if you can get an automatic right to renew the lease on similar terms. This may mean you will have to submit to a rent review, but try to negotiate on this. It is in your interest to make sure that it is upward-downward, rather than upward-only, which you landlord would prefer. Given the state of the commercial property sector at the moment, I have sympathy with any tenant who find themselves paying increased rents while similar premises could be significantly cheaper.

Starting a business is a huge undertaking, and taking on a commercial lease only adds to the magnitude. The last thing a fledgling business wants or needs is to be saddled with premises that are unsuitable, expensive and difficult to get away from. When deciding where to settle your business, keep your wits about you, go through all of the details with a fine toothcomb, make sure that you have an escape route that is legally enforceable. Office space and location are important, but they could sink your business if you don’t pay attention to the strings attached to them.

[Image by Borkur.net]

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