What leasing costs can I expect for business premises?
Rarely are two leases identical. There are, however, certain common factors in almost every lease. There will always be clauses relating to the rent and charges.
Setting a rent
The rent will be set in the contract. Rents vary enormously by location, condition of premises, lease restrictions and the general state of the property market. It is possible to get a flavour of how much a premises should cost by talking to local tenants and working through the lists on offer from agents. The number of letting boards, the length of time local premises remain empty and surveys published in specialist journals will also help set benchmarks.
It is, however, normally worth employing a specialist with detailed knowledge of the area to negotiate with the landlord’s advisors. Only they will know what rents have been achieved rather than advertised as asking levels.
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. Normally these will be based on a small percentage of the rent but can be negotiated. A specialist can more than repay the fee by working through the various lease conditions, modifying some and negotiating reductions for others. Sometimes a landlord will even grant rent-free periods where the market is slack.
Most small – and particularly new – businesses are likely to be asked to provide a guarantee that they can meet the cost of renting. Landlords demand accounts even from larger businesses, so this should come as no surprise. A bank guarantee can suffice but some may require a cash deposit or charges on directors’ personal property.
Normally rents are paid quarterly in advance. Watch out for penalties for lateness. These could be stiff charges or even eviction and restraint on assets like office equipment.
Rents are adjusted periodically to match market conditions, usually each three to five years. Watch out for a common wording which says these will be reviewed “upwards only.” While market levels may be higher at that time, they could also remain static or even have fallen. 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.
The lease should contain details on extra charges. Watch out for catch-all powers for landlords to make their own calculations on costs. This is very important when sharing premises with other tenants, as charges will be imposed for areas such as cleaning and lighting stairs and corridors, insurance (see below) and decorating and repairing the outside of the buildings.
Protection of the building is generally paid for by the tenant but organised by the landlord. In multi-let premises this is almost universal. Check whether this is rolled up in service charges, making it more difficult to discover costs. Find out how much input you have in the choice of insurer, what responsibilities the landlord has for reinstatement of the premises if they are damaged and your obligation to pay rent while premises are unusable.
These are usually paid by tenants but may be sometimes rolled up in a service charge. They are crucially important at the moment as a new scale of charges is set to come in this year (2000). As rates are set according to market rents, these could substantially increase costs in areas where values have risen steeply over the last five years, such as the South East and major provincial city centres.