Top 10 traps in business leases

30 November 2012
Top 10 traps in business leases

Legal expert Debra Kent explains how to negotiate the best deal and quantify problem points in existing leases

THE PROBLEM There are a number of important areas to check in a business lease. Failure to get it right might mean you cannot operate your business properly or sell it on.

THE LAW The majority of the lease provisions need to be agreed between the parties although there are many standard clauses.

EXPERT ADVICE 1 Rent review Leases for 10 years or more will include a rent review usually to the market rent every five years. Sometimes reviews are calculated in accordance with an inflation formula such as the Retail Prices Index. Even if market rent is more than the lease rent, leases rarely allow the rent to decrease. There are other traps to avoid, such as paying rent on the value of your fit-out works.

2 Selling your lease The terms upon which the landlord can refuse consent to assign should be fair and reasonable and not include any onerous conditions which a potential buyer cannot meet.

3 Subletting and sharing It may be possible to sublet part of the property to someone else if you do not need the whole area. If the lease does not permit subletting of part or the sharing of occupation it will be entirely at the landlord's discretion.

4 Subletting the whole You may need to sublet all the property for a period if assignment is not practical. Does the lease permit this?

6 Opening hours Are there restrictions on hours of operation or deliveries which are a problem for your business?

7 Alterations Most leases permit non structural internal alterations but frequently prohibit external or structural alterations. You might need to put up external signage, air conditioning or extractor fans which the landlord could potentially refuse. The landlord will want some control over alterations but these should not interfere with the proper operation of your business.

8 Use of the property The landlord will want to restrict the use of the property to maintain control over his investment and to avoid adverse competition between tenants. You will want the use clause to be as wide as possible to enable you to carry out your business, change the concept if necessary and to underlet or share occupation if your business demands it. Also, should you wish to sell your business, the lease will be more attractive to another business if there is flexibility.

9 Lease term Is the lease term long enough to enable the business to be set up and potentially sold during the term? Or is it too long and expose you to liabilities for longer than you need, making it unattractive to buyers? If the lease term is too short or has little of the term left to run it may also be unappealing to a buyer. Does the lease have the benefit of the Landlord & Tenant Act 1954, which gives business tenants possible rights to renew the lease?

10 Break clauses It is always good to have flexibility, if you wish to leave the property or threaten to leave unless the landlord makes some concessions - perhaps on the rent.

PRACTICAL ADVICE These tips should give a good starting point for negotiating a new lease or identifying problems in an existing lease. Whatever your situation, is it is important to plan ahead and consider how your business may grow or evolve. Leases can only be varied with the landlord's agreement. The landlord's consent may be necessary where any activity is otherwise prohibited in the lease. The landlord may be entitled to refuse consent and certainly you will be required to pay any costs he incurs. A tenant-friendly lease will save you time and money in the long run and will be helpful if you ever want to sell your business.

Contact Debra Kent is a real estate partner at Charles Russell

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