A New Business – Tenant’s Guide to Leasing Commercial Property

At this stage, your business concept is already complete, any company formed (if applicable) and you now need to secure a property from which to trade.

Although each particular transaction will differ according to its own facts, here is a brief guide.

Heads of Terms

After finding suitable property, you will need to negotiate the heads of terms with the landlord or his agent if this is a grant of a new lease.  You should consider whether security of tenure, (a tenant’s entitlement to a renewal of the lease at the end of the term, subject to the landlord establishing a statutory ground of objection) is to be included or excluded in the lease as this can be a stumbling block for parties.  You may wish to instruct solicitors at the outset of negotiations to advise about this issue.

Will the landlord accept monthly payment of rent rather than quarterly to help with cash-flow?  If it is your first business, the Landlord is likely to request a rent deposit and/or personal guarantee if you are renting through a newly formed company.

If the property you have found is already let to an existing tenant, then you will be purchasing the lease of the property from the existing tenant, known as an “assignment of lease”.  You may also be purchasing the business from the existing tenant.   An assignment of lease will require written consent from the landlord.

Due Diligence

Once the heads of terms are agreed and you instruct your solicitor, the usual conveyancing work will be carried out.  Either the landlord’s solicitors will provide a draft of the lease or if it is an assignment of lease, then the current tenant’s solicitors will provide a copy of the existing lease together with any further evidence of title and supporting documentation.

Your solicitor will report to you on the documentation received and advise that the usual searches (e.g. Local Authority Search, Drainage and Water Search, Environmental Search, Chancel Repair Search, etc.) are carried out to ensure there is nothing adverse against the property.   The aim of this work by your solicitor is to ensure you know all the responsibilities you will have in relation to the property and the accompanying payments, which will assist in preparing your budget.

Your solicitor must also agree the terms of a deed documenting the rent deposit or guarantee, if applicable.

Exchange of Contracts?

Unlike residential conveyances, normally there is no exchange of contracts with commercial property unless completion is conditional on some matter, e.g. the Landlord is carrying out works prior to completion or you are purchasing a long lease for a premium.

However if you are taking an assignment of lease and purchasing the business, this will require a separate contract which must be exchanged.

Completion

On completion, rental monies may be required (depending on the length of any rent free period agreed) together with any rent deposit (if applicable) and any apportionments such as service charges or buildings insurance contribution.   Once these sums are paid, completion takes place via a telephone call by the solicitors, and you can then collect the keys and commence trading or any redecoration/fit-out works which may be necessary first.  Usually a tenant will have a rent free period to cover the time required for the redecoration/fit-out works.

Your solicitor will arrange the payment of any Stamp Duty Land Tax (if applicable) and register the lease at H M Land Registry (again, if applicable).

And in the future…

If any alterations to the property are required in the future, any change of use, any terms of the lease are to be varied, or rent reviews, to name but a few issues, you are likely to require your landlord’s prior consent and should first contact to your solicitor to discuss the legal implications.

Alexy Pemberton

Solicitor

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