Renting a commercial space is one of the most important commitments that a company or an entrepreneur will make both in terms of cost and the duration you are signing up to. It is therefore essential to know what you are getting yourself into.
Negotiating a commercial lease is always a complex process in the UK. There is no predefined framework like the 3-6-9 commercial lease in France that would facilitate the agreement. The landlord – tenant relationship tends historically to favour landlords who make the most of it. Each case is different and presents its own set of challenges.
The subject is obviously vast and there are numerous issues at stake. In this article, French Touch Commercial will go over the main points to be aware of as regards commercial leases in the United Kingdom.
In this first article, we will review the different ways to take out a lease.
Great! Your business plan is now complete (Or do you still need a helping hand?). You are now ready to take the plunge and sign your first commercial lease. The only problem is that the terminology is complex and the options numerous. Let’s have a look at the different options available to you: signing a new lease, a lease transfer, a rental or a licence.
- New commercial lease
A commercial lease gives the tenant the right to occupy the premises in order to conduct commercial activities. It describes precisely the rights and duties of the various parties concerned during the term of the lease.
A new lease is offered when the previous one has expired or has been cancelled (this is called a lease surrender). It can also be for a new building.
We strongly recommend you hire a solicitor to supervise the drafting of the lease because it is a very important document that will commit you for several years. The lease includes the following information:
- Description of the property
This is the description of the premises you would like to rent, as described in the property deed. This description includes the address, a plan (make sure that the outdoor spaces / terraces are also included!), as well as a description of the various facilities. A more in-depth inventory can be made via the “schedule of conditions”.
- Type of leases
In most cases, new commercial leases are “Full Repairing and Insuring lease (FRI lease)”, which means that it is up to the tenant to maintain and insure the premises.
However, it is possible to negotiate this for premises subject to less competition and for which the scope for negotiation would be greater. Note also that most of the leases offered on the market are “outside the act “, in reference to the Landlord and Tenant Act 1954, which stipulates in particular the procedure to follow at the end of the lease. When the lease is “inside the act“, the tenant has a right to automatic renewal (except for a few special exemptions), which would allow him to specifically sell the lease (read further down about lease transfer).
The duration of commercial leases is not fixed by law and it’s all down to negotiation. Unless otherwise stated, landlords tend to favour long-term leases (10 or 15 years) where tenants would sometimes rather have more flexibility (3 or 5 years).
- Break clause
When the lease is long-term, it is common to negotiate “break clauses” every 3 or 5 years. These break clauses can be mutually beneficial or to the advantage of only one of the two parties.
- Rent conditions and reviews
The lease describes precisely the terms of payment of the rent. It will state the amount to be paid, the frequency and any other information relating to the payment. It is not uncommon to have complex arrangements based on a percentage of the turnover in addition to a fixed rent. It is also possible to negotiate stepped rents. Keep in mind also any period of free rent that your agent may have negotiated for you!
It pays to understand who the landlord is and their approach in order to negotiate the best deal. An individual landlord might pay close attention to their cash flow and be reluctant to grant long periods of free rent. On the other hand, they might be more agreeable to lowering the rent. Conversely, a large property landlord would have less of an issue in granting a period of free rent rather than lowering the nominal rent so as not to affect the value of their portfolio.
The landlord has a right to oversee the use of their premises and will want to ensure that the activities carried out by the tenant are precisely described in the lease. However, it is always preferable to have as broad a description as possible in case the tenant wishes to transfer their lease (see point below). It is also important to note that usage restrictions may be imposed by the council. However, this point is not contractual with the landlord. The tenant will have to make sure themselves or via their solicitor that the activities are compatible with the “Class of use” of the premises (for more information, refer to our guide on the class of use).
- Transfer of lease and sublease
A commercial lease will commit you for the contractual term. However, it is possible under certain conditions to get out of it. Read further down below.
Any new commercial lease will generally be accompanied by two other legal documents: the deposit deed (a legal document that stipulates the security deposit, often worth around 6 months’ rent) and the license for alterations, a document that describes the work that will be carried out on the premises.
- Transfer of lease
The 2nd option available for you to take possession of premises is the transfer of a lease or “lease assignment”.
The lease assignment is when a tenant (the assignor) wishes to cease their activities and transfer or sell their lease to a third party (the assignee) who will in fact become the new tenant.
A commercial lease always provides for this scenario. The landlord cannot normally oppose it though he can have a say in the transaction. In particular, one has to make sure that the new tenant will offer the same guarantees as the current tenant. It is also likely that the landlord will ask for the balance sheets of the previous years.
It is important to note that the initial lease cannot be renegotiated and must be taken over as is by the new tenant.
Please note that, contrary to what one might think, proceeding with a lease assignment does not release the assignor from their former obligations, in particular with regard to the payment of the rent. In most cases, each lease assignment will be accompanied by the signing of an Authorized Guarantee Agreement or AGA which will detail to what extent (and for how long) the former tenant will remain responsible for the payment of the rent.
This agreement can of course be negotiated and the payment of a security deposit can replace it.
Lease assignments also often include a premium. The premium is the sum that the assignee will pay to the assignor to recover the lease (even if it is not mandatory). There is no particular rule for determining the amount of the premium. The two main elements to take into account are the intrinsic quality of the lease (Is it within or outside the act? Is the rent below the market price? etc.), as well as the quality of the layout of the premises (kitchen, cold room, ventilation etc.). Unsurprisingly, it is often restaurant transactions that lead to the payment of premiums because the CAPEX is much higher than for retail.
The third option is to sublet. In this situation, the tenant will remain the main interlocutor for the landlord and will remain responsible for the payment of all invoices.
The interest for a tenant in subletting can be twofold. It can allow them to sublet part of their premises which may be unused and therefore generate an additional income. Note that there are many commercial leases that will prohibit a partial sublet. It is therefore necessary to ensure that the lease will allow it.
Another potential reason would be when the tenant has signed a lease with a rent that is much too high, making the commercial operation unprofitable. The high rent also makes assignment impossible (other than to pay a reverse premium), so the tenant can opt to limit their losses by remaining responsible for 100% of the rent while subletting the premises at a lower price. This will allow them to wait out the lease while reducing their financial exposure.
Ultimately, the decision for the tenant to proceed with a lease assignment or a sublet will depend on what the lease authorizes and on the situation of the market. The support of both a solicitor and an agent will therefore be a necessity and an asset.
Lastly, a license is a much more flexible way of occupying premises. This option gives fewer rights but also fewer duties.
By signing a license, the tenant does not have exclusive possession of the premises. This is not his “home”. Therefore, he will be forbidden to sublet or transfer this license.
On the positive side, the process is much simpler and less expensive than a traditional lease. The legal costs are much lower, or even zero, and it may not be necessary to pay a deposit.
Licenses are often best suited for short occupancies as well as small premises. It is common to use it, for example, for temporary occupations or pop-ups in shopping centres or even fairs.
Choosing a license over a commercial lease will depend on the needs of both the landlord and the tenant.
As you can see, taking possession of commercial premises is not as simple as it may seem and there are many factors to consider.
Hiring a solicitor and an estate agent will not only save you time but also money.
French Touch Commercial specializes in supporting companies and entrepreneurs from France and other countries in the development of their activities in the United Kingdom. Please call us, we will take care of everything for you!