Signing a commercial lease: A guide to renting small business premises
Are you ready to sign a lease for a commercial property? Here’s everything you need to consider; including what you should negotiate before you sign...
So, you’re ready to lease your own business premises. Whether you’re moving into your own office space for rent, setting up shop in a retail unit or something else, this is a hugely exciting time for your business.
But instead of signing on the dotted line immediately, it’s very important that you carefully consider the contract (also known as the commercial lease agreement) the landlord offers you.
After all, you want the best deal you can get – and to this end, it’s crucial that you work out whether or not there’s anything in the contract that ought to be changed to your benefit.
So, read on to find out everything you need to know about commercial leases, and the clauses and conditions you’ll need to be aware of…
In this article, we’ll cover:
Hiring a specialist lawyer
First of all, it’s worth knowing that there’s likely to be clauses and conditions in your commercial lease that you’ll want to change before you can sign it.
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It’s standard practice that leases can be negotiated over, but it’ll be worth employing a lawyer – with detailed knowledge of commercial property – who can go over the lease with a fine-toothed comb and negotiate with the landlord’s advisors on your behalf.
Try to find someone who is not too closely involved with the landlord through other deals, and ask for an estimate of their charges in advance.
A specialist will often prove his or herself worth the money by ultimately getting you a better deal on renting the premises.
Checking a property’s commercial classification
It’s easy to assume that once you’ve secured a commercial property for lease, you’ll be able to do whatever you like with it. Unfortunately that’s not the case.
This is because commercial properties fall under certain categories which specify the type of business that can be run from them. The following are just some of these key commercial classifications (also known as planning use classes):
- A1 – Retail premises i.e. shops, hairdressers, travel agencies, funeral homes, sandwich bars and more
- A2 – Professional and financial services i.e. banks, solicitors and estate agents
- A3 – Establishments where customers buy and consume food and drinks on the premises i.e. cafes and restaurants.
- A4 – Drinking establishments i.e. pubs and bars (but not night clubs)
- A5 – Hot food takeaways
- B1 – Business use i.e. offices or research and development facilities
- C1 – Hotels, hostels, boarding houses and guest houses
- C2 – Care homes, schools, colleges and training centres
So, before looking to rent a certain property, you’ll need to check which of these classifications it falls under.
Changing a property’s commercial classification
If you’ve found your dream small business premises to let but it turns out to be the wrong classification for your business, don’t worry – you can request planning permission from your local authority to have the classification changed.
However, planning consent might not be accepted if the local authority feels the change of classification would not benefit the area.
When making this decision, the local authority will take into consideration factors such as:
- Whether there is a need for your type of business in the area
- The traffic and parking requirements that’ll come with your business
- The ways in which your business might cause nuisance; such as noise, smells or environmental hazards
- Your business’ trading hours
- Any objections from other occupiers and residents in the area
Your commercial lease: Key clauses to look out for
When signing a lease, you will, of course, need to be aware of how long it’s intended to last for. No two leases are the same, but in general you can expect leases for office space to start at around five years, with retail leases often starting at 10.
To a small business or start-up whose future is still unpredictable, this can seem like an unviable commitment. So, to negate this, you’ll want to negotiate a few concessions with your landlord to take the pressure off. These might include:
- A break clause. This is a clause in the lease contract which enables you – or your landlord – to end the lease early. It may be that the break clause only comes into effect after a certain amount of time (for example, three years) or on particular dates, or it may be that it can be exercised at any point during the lease.
- The ability to sublease. If it comes to a point where the premises no longer suits you, it might serve you well if – instead of totally ending the lease – you’re able to move out and sublease the property to another business.
Remember: You’ll need to be wary of stamp duty, as this will be payable on the length of your agreed lease and won’t take any break clauses that you’ve negotiated into account.
Importantly, you’ll need to make sure you have a thorough understanding of all the conditions of payment that apply to your lease. Ensure you understand:
- With what frequency you’ll need to pay your rent. Rent on commercial properties is usually paid quarterly and in advance, however some landlords do favour monthly payments.
- When you can pay your rent. Do any deadlines apply to when you can pay each quarter/month? For example, will you incur penalties if you don’t pay within 10 days?
- The penalties that will come into effect if you pay your rent late. These can range from stiff charges to eviction and retention of your assets, like office equipment.
- How you’re to pay your rent and any additional charges. It sounds obvious, but be sure to set up payment with your landlord early to avoid any unforeseen problems when it comes to paying your first instalment.
Most businesses – and particularly those that are small and new – will be asked to provide a rent guarantee to prove they can consistently meet the cost of renting before a landlord will agree to lease to them.
In many cases a bank guarantee and financial accounts will suffice, but some landlords might ask for a cash deposit, or even charges on your personal property.
Your commercial lease: Factors affecting the cost of your rent
How much will renting a business premises cost?
It’s very difficult to give a generalised figure for how much renting your business premises is likely to cost because the price tag will depend heavily on several factors, such as:
- The property’s location
- The condition of the premises
- The size of the premises
- Any lease restrictions
- The state of the property market in general
The best thing to do to get an idea of what you’ll be paying is to speak to local tenants and research into properties in your area and find out what their rental costs and other charges consist of.
You can also make note of how many letting boards are on display in your area, research the amount of time properties remain empty and read surveys published in specialist journals to get a flavour for the local market.
Of course, if you’ve enlisted the help of a specialist, they should be able to advise you on how much you’re likely to pay and what can be negotiated for.
Alongside the above, there are a couple more factors that will affect the amount you pay your landlord. Be aware of…
A rent-free period is, as you’d expect, a period of time during which it’s been agreed that you don’t need to pay any rent at all.
It might seem unbelievable, but there are plenty of reasons a landlord might offer a rent-free period (or periods); from giving an incentive for you to sign the lease in the first place to compensating you for any additional works and repairs that need to be done to the property, and the loss of business this may cause you.
Of course, your landlord won’t offer a rent-free period if it’s not necessary. But if you think you’d benefit, you and your chosen specialist can try to negotiate one – after all, you’ve nothing to lose (other than a few months’ worth of rent).
Remember, if you’re offered a long rent-free period it may be that the eventual rent you’ll need to pay will be inflated to compensate for this, so be sure to look out for this possibility.
As a long-term tenant, the amount you pay will likely be subject to rent reviews. Taking place regularly – usually every three to five years – rent reviews happen so that rent can be adjusted to match market conditions.
While market levels can increase – meaning increased rent for you – they can also remain static or even fall. However, you’ll likely find common wording in your lease that says your rent will be reviewed “upwards only”; meaning that your rent can only increase and will never decrease, even if the market dips. This is standard practice among landlords and it’s unlikely that you’ll be able to negotiate against it.
However, what you can do is negotiate with your landlord to ensure they can’t increase your rent by too much in one go. You’ll need to carefully read and understand the rent review clause of your lease so you can do this effectively.
Some leases now include the continental practice of matching rents to the retail price index instead. Big retail landlords are also introducing a two-tier system where a basic rent is paid and topped up by a turnover charge.
Your commercial lease: Additional charges
As a business tenant, rent isn’t the only charge you’ll be faced with; and you’ll find there’s a series of additional fees you’ll need to cover in your payments to your landlord.
It may be that your rent payment is increased to cover all of these in one go, or that your landlord asks for a lump payment, alongside your rent, that covers them all. Possibly you’ll be asked to pay for them all separately.
These charges may include…
Service charges cover the fees that landlords pay out to maintain the property, and then charge back to you.
They’ll often include:
- Cleaning, maintenance and repairs to the parts of the property that are shared by multiple tenants, such as hallways, reception areas, stairwells, lifts, the building’s facade, plumbing, roofing and drains.
- Management charges that the landlord pays to their agents with regards to the management of the property
Service charges are typically worked out on one of two basises:
- A fixed charge: This will be a pre-set percentage of all the costs the landlord expects to pay for the whole building.
- A proportional charge: Perhaps the fairer option, a proportional service charge considers your section of the building as a certain proportion of it, and charges you accordingly.
For example, imagine you share a building with one other business. Your unit takes up 30% of the property, whereas the other business’ takes up 70%.
A fixed service charge will likely mean you and the other business both need to pay for 50% each of the landlord’s service costs. Meanwhile, a proportional charge will mean you pay for 30% of the service costs while the other business pays 70%.
The desirability of the property and location can be a factor here. If the premises is highly desirable, it’ll be more difficult to negotiate a change to proposed service charges than if the property isn’t in high demand.
Watch out for catch-all powers for landlords to make their own calculations on costs. In this case, it is possible to negotiate with your landlord for limits to be placed on how much they can ask for in service charges.
Alongside your service charge, you’ll also need to pay for the following. These might be tied up as part of your service charge, or your landlord might ask for them separately:
- Building insurance – Typically, it’s your landlord’s responsibility to organise this but you will have to pay for it (in multi-let premises this is almost universal). However, it may be that you’re allowed to assist in choosing an insurer and seeking out the best policy – it could be worthwhile to find out whether you can have an input and help find the best deal for you.
- Business rates – These are a kind of tax charged on commercial properties. While they can be paid to your landlord, who’ll then pay them to the local council, it may be that you’ll need to pay them directly to your local council instead. You can work out how to calculate your business rates with our guide.
You’ll need to check whether these costs are included in your service charge or not. While, if they are, it’s good to know everything is covered in one payment, this can also make it difficult for you to understand how much each component costs, and what your money is actually going towards.