Taking on new premises can open up a range of possibilities for start-ups or SMEs. Most start-ups will want to take on short to mid-term leases of commercial premises with the flexibility to expand into space or move into larger premises if launch has been a success.
1. Location – look around for property that is in over-supply and negotiate hard on rent. Avoid prime locations if you can. Less popular postcodes or properties in need of modernisation can be perfect for an SME. If there are any obvious repairs/ fit out works that need to be done prior to the commencement of the lease try to negotiate that the landlord will do these at his own cost to a spec and design that meets your business needs. Rent free periods are usually agreed to cover fit out costs.
2. Lease term – a standard term is 5 for office space and longer for shops and industrial sites. If that is too long or uneconomical, try to agree a break clause and negotiate hard for a rent-free period whilst you get your start-up off the ground. You can sometimes find shorter lets on good value terms which might suit, for example where a landlord needs an occupier pending development.
3. Rent – is it affordable and is it correct for the area? Stamp Duty Land Tax may be payable on the rent, so check this whilst still in negotiations with the Landlord . http://www.hmrc.gov.uk/SDLT/calculate/leasehold.htm. You will also have to be responsible for the cost of insurance and service charges which your lawyer can investigate and advise on.
4. Rent reviews – landlords are keen to have upwards only rent reviews as often as possible. Every effort should be made to refrain from rent reviews for leases of up to say 5 years. Rent reviews should be spaced out as much as possible in leases of more than five years.
5. Repairing obligations – A full repairing and insuring commercial lease will generally require the tenant to maintain and repair to a high standard. Try and negotiate a limitation on your liability so that you don’t have to maintain the premises to any better standard than they were in at the beginning. If the property is in need of repair then record its current state in a Schedule of Condition which also will prove useful when negotiating the cost of dilapidations which the landlord will most likely request at the end of the term of the lease.
6. Break clause – this provides the business with flexibility to be able to end the lease and move to larger premises or indeed downsize if the business is not a success. Equally avoid agreeing to the landlord having an option to break. If the tenant decides to serve a break notice on the landlord a solicitor should be instructed to assist. This is a very common area of dispute and careful steps need to be taken to ensure that the break notice is deemed valid.
7. Security of tenure – the law gives most business tenants the right to a new lease when the lease expires. However, landlords often insist on this security being excluded . If security is excluded the landlord can recover the premises at the end of the lease term, whereas if security is included the tenant is legally entitled to negotiate a new lease unless the landlord can show to the court certain grounds for opposing a new lease.
8. Business rates – should be accounted for in the business plan. Tenants are required to pay rates and they can be very high. On the other hand, empty property will cost the landlord money as business rates continue to be payable once a property has been vacant for a few months. Some landlords may be willing to let the tenant occupy the property for low rent on a short term basis, provided the tenant pays the business rates.
9. Flexible short term lets – post code, appearance and interior space of a property can be very high on the priority for certain businesses that are keen to create strong brand image. If this is you then look for some of the newer and more innovative properties on offer. Serviced accommodation, and sharing/collaboration space are all alternatives, with cheaper rents and flexibility to be able to move when you want to. These can often include services and IT.
10. Assignment – ensure the lease allows you to assign or underlet with little conditions as possible. It is essential for any business to trade from the right premises and for appropriate due diligence to be carried out beforehand to eliminate the risk of unforeseen costs. We can work with you and other parties such as surveyors to understand the requirements of your business to be able to give you the advice you need.
Contact a member of our Commercial Property team if you have any enquiries.