Deal or no deal, getting lease terms right, straight out of the box

The aim

If you are a landlord, your priority will be to let premises quickly and on the right terms.

If you are a tenant, your priority might be to move your business on – whether physically or financially.

The deal

Deciding to enter into a commercial lease usually means that there is to be a long term business relationship between previously unacquainted companies and/or individuals.

The parties will generally want to achieve a bargain which, on balance, is reasonably fair to both parties.

The pitfalls

Negotiating the basic terms of a lease may seem simple, but if you don’t get the terms right at the very start, delays and problems may occur during the transaction.

The solution

This article focuses on some common traps when dealing with commercial leases, and how to avoid them.

Trap 1 - Negotiating terms without first taking legal advice

If you take legal advice before you start to negotiate terms with the other party, you will almost certainly save money. This may not be something you usually hear about instructing solicitors – but it is true!

A skilful solicitor will:

• Ask you about the property in question - its age, its condition, whether it is easily divisible, what works may be needed to bring it into a decent and usable state.

• Discuss with you your intentions for the property and your financial expectations, in terms of rent, service charges and insurance costs.

• Help you to decide whether your priorities – whether as to timing or as to finance – are both achievable and realistic.

• Liaise with the letting agents, to craft a set heads of terms that are right for you, and – unless you say otherwise - fair to all.

You should then have a good foundation upon which to build.

If you don’t see a solicitor first, you could fall into….

Trap 2 - Agreeing to something you shouldn’t

We find that if we become involved only after heads of terms are agreed, there will usually be something that we advise you to change:

• Repair obligations: 

             • Landlords may be unrealistic about what tenants should be expected to repair (and be disappointed when tenants don’t agree) – 

            •Tenants may agree to onerous (potentially expensive and troublesome) repair obligations, without really knowing what they mean, whether practically, financially or legally.

• Contributing to the other party’s legal costs. Does it really make sense to pay another party’s costs, thereby paying their solicitor to argue with you?

• Granting or accepting an unprotected lease. Heads of terms will often mention the exclusion provisions of the Landlord and Tenant Act 1954. Whether you are the landlord or the tenant, you should take early advice upon the effect of excluding statutory rights of renewal.

If we advise you after the event that something in the heads of terms needs to be unravelled or renegotiated, you may fall into….

Trap 3 - Being accused of reneging on the deal

This immediately puts you on the defensive. The real traps linked to this are as follows:

• You feel pressure to agree a deal which is not right for you.

• You feel pressure to conclude a deal without properly considering all of your options

• You and the other party to the lease do not get off to a good start in what may be a long term relationship.

The legal and practical arguments in renegotiating heads of terms may lead to…

Trap 4 - Delay

If you are a landlord, delay means no rental income. If you are a tenant, it means that your business is on hold until issues are resolved.

Delay therefore creates…

Trap 5 - Financial loss

This is quite the reverse of what the parties want to achieve, when negotiating heads of terms.

If you don’t get the heads of terms right from the start, you may be paying your solicitor to deal with necessary changes.

The Closure

If you haven’t fallen into Trap 1 (because you have spoken to your solicitor first), you should be able skilfully to avoid the other traps and, in so doing, minimise delay and costs.