What to consider before taking on business premises
Use of premises and length of tenure will vary. What should you look for?
Use of premises
Most leases overflow with restrictions on how buildings can be used. This is partly to protect the landlord’s investment by, for instance, preventing dangerous or noisy activities. There may also be covenants from the original ground landlord on types of business activity as well as local planning restrictions. Sub-letting is commonly denied without the permission of the landlord. If a lease contains too many of these caveats, it can restrict ability to pass on the lease to another tenant when you want to move on.
Redecoration and repair
Designating when, how, and how often, this should take place, and who should do it. This can be a crucial factor for older premises, where hefty costs may be involved, and many modern leases load most of these onto tenants. Landlords usually demand power to carry out the work at your expense if it is not done on time and to a required standard. Tenants also face what are called dilapidations schedules at the end of their lease term, where the landlord can demand payment where premises have not been kept in good condition.
Structural changes and extensions are usually restricted. Internal changes require negotiation and may need clearing when the lease ends.
Length of commitment
A tradition has grown up in the UK for long leases. At one time these ran for as long as a century but the term has gradually been eroded to between ten and 15 years. These generally apply to new buildings or those in high-demand city centres, however. Much shorter terms can be found – or negotiated – nowadays as landlords adjust to conditions where tenants are unwilling to commit themselves for such long periods.
Three to five years is generally considered a good compromise between a landlord seeking security of investment and small businesses unsure of their future. For financial reasons, a landlord may prefer to maintain the lease length at ten years but allow a break clause. This effectively means the tenant can leave after, say, three or five years. On the other hand, it also means that the landlord can demand this break even when a tenant does not want to move, causing expense and disruption.
Security of tenure
Many businesses may prefer to feel secure with longer leases. They are normally assured of this by the 1954 Landlord and Tenant Act, which gives them the right to a new lease when the existing one expires. But sometimes these restrictions do not apply. Serviced premises are one example; a sub-lease or older buildings in temporary use pending redevelopment are others.
Others may seek the freedom to get out of their commitment. Watch out for restrictions on sub-letting or assigning a lease. These are common, as landlords usually like to keep control on who is using their buildings. Be aware that this may involve you paying someone a premium to take on the responsibility for a lease.
One crucial factor when taking on an assignment is whether that lease is subject to an archaic rule called privity of contract. Until the law was changed in 1996, a tenant remained responsible for rent and other charges even after assignment.