Lease negotiation in a recession
Our quick guide to lease negotiation
is one of the most popular articles on our website here's an updated version reflecting the realities of negotiating a lease from a tenant’s perspective in the current economic climate.
The first thing to bear in mind is that tenants are enjoying their strongest bargaining position for many years. With commercial property almost halving in value and rents continuing to fall, landlords are really on the ropes and now is the time to strike a really good deal.
Below is the advice I originally gave in italics together with the latest advice if you are about to commence negotiations. Don’t agree to pay the landlord’s legal costs – it’s not standard practice
. This is an absolute must in the current environment. No tenant should be paying the landlord’s advisors costs at the moment. Ask for a rent-free period -
you're likely to get it in the current market and it improves your cashflow for a few months (especially important if you are a new business). This advice still stands but the amount of rent free period you are likely to be able to negotiate has increased because a landlord would rather have a tenant in occupation rent free but paying the business rates rather than no tenant at all. Another way to improve your cashflow is to negotiate payment of rent monthly rather than quarterly.
Monthly rent payments are becoming more and more common with some tenants successfully renegotiating existing leases to achieve this. Ask for a break clause
(a right to end the lease early). It gives you vital flexibility and is an easier way out of a lease than trying to sell it on or subletting.
This is critical. Finding someone to take over your lease is incredibly difficult at the moment so the right to walk away is more important than ever. You should also think about rolling break clauses ie the right to terminate at any time on, say, six months notice rather than the right to terminate only on a particular anniversary of the start of the lease. If the landlord agrees to a break clause, think about when your business might need to move premises and make sure the timing of the break suits your likely needs.
This goes hand in hand with the previous point but there is more scope at the moment for negotiating multiple breaks or a rolling break so that you have a number of opportunities to get out of the lease rather than just one. Consider the Stamp Duty Land Tax (SDLT) consequences. SDLT on leases involves a complex calculation but as a rule of thumb multiply the rent by the number of years of the lease and then deduct £150,000. Your SDLT liability is roughly 1% of the figure you have left. eg £25,000 rent on a ten year lease would give rise to a SDLT liability of roughly £1,000.
SDLT hasn’t changed recently for commercial leases but with an increasing move towards shorter terms and with rents falling, increasing numbers of leases are not liable for SDLT in any event. If the premises are in anything less than perfect condition insist a schedule of condition is prepared. This will detail any items of disrepair already existing at the start of the lease so that you don't have to foot the bill for these repairs.
This is still good advice but an even better approach is to get the landlord to put the property in full repair before you take up occupation. With plenty of choice of available properties, landlords need to make their premises more attractive to tenants and there is a good chance you can negotiate a deal involving the landlord carrying out or at least contributing to improvements to the property. If you can possibly manage it, ask for the lease to be put in the name of your limited company (if you don't own one then you can form one for very little cost for this purpose) and offer a rent deposit rather than directors' guarantees if the company cannot provide adequate references. This ringfences your liabilities.
This is becoming more difficult to achieve partly because many landlords have experienced default by a corporate tenant and have discovered that a three month rent deposit doesn’t adequately protect them if the premises are difficult to re-let. If you can negotiate a good deal in other areas you may have to accept that directors’ guarantees need to be offered especially for companies without a good trading history over the past three years. If there is a service charge, request that it be capped to avoid a very nasty shock when the landlord asks you for your share of the cost of replacing the roof.
Anecdotally, I’m hearing from tenants that administration fees charged by landlords and managing agents seem to be rising so a separate cap on these may be called for. Have all signage and initial alterations approved before signing the lease. If you wait until after the lease has been completed, you may be required to complete a formal licence and pay the landlord's legal and surveyor's fees.
More important than ever in circumstances where professionals who are short of work seek to charge as much as possible for these consents.If the rent is to be reviewed during the term of the lease then ask for an upwards-downwards review rather than the traditional upwards-only review.
You may still struggle to achieve this but the good news is that rents have fallen so much already that if you drive a hard bargain on the initial rent the chances are that there isn’t much scope for the market rent to be much lower when the review comes round in any case. If the value of your business is linked to the location of your premises (eg shop, restaurant) then consider asking for a longer lease and strongly resist the landlord removing your statutory right to renew the lease at the end of the term especially if you plan to sell on your business as a going concern once you have built it up.
Now is certainly the time to negotiate a long term deal on beneficial terms as the market will turn at some point during the next two or three years.
For futher advice or direct help with negotiating your commercial lease contact Commercial Property Lawyer, Steve Petty on 01926 629005 or email Steve here.
Article added: 23 June 2009 © Cousins Business Law
This article is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.
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