Don’t stop at rent questions

Myth #2: When negotiating a lease for your business, the amount of rent is the only thing to worry about.

There comes a time when every business needs to relocate to new premises. 

Whether you’re upsizing, downsizing, moving to a better location or the boss just fancies a better view from his office window, there’s a good chance you’ve got a new commercial lease to sign. 

There’s so much ‘legalese’ in there you can barely be bothered to read it – they all say the same thing anyway, so just show me where to sign. Where’s the harm?

Don’t make the mistake of ignoring the important role of property in your business. When negotiating the deal the issue of rent dominates the discussion, but don’t forget to look at the longer-term issues which can affect the property. 

The following is a guide on points to consider when negotiating a commercial lease:

1. Know the premises

• Ascertain what fit-out works are required and obtain written consent from the landlord before you sign the lease.

• Check the adequacy of facilities such as kitchens, toilets and parking.

• Does the property have adequate access and services (e.g. Internet and cabling)?

2. Check the condition of the premises

• Check existing disrepair, and invest in a proper survey if concerned.

• Check the air conditioning, drainage and electrical systems.

• Be careful‚ full repairing leases require tenants to put and keep the property in good repair, regardless of their condition at the outset.

3. Possibility of rent-free periods

• How long do you need to get the premises up and running? Many landlords will agree a rent free period to cover your fit out period. 

4. Consider maintenance fees

• Seek a cap on maintenance fees. An unlimited obligation to contribute toward the repair and maintenance of the building can lead to large and unexpected costs. 

• If you have a short term lease, don’t pay for long term improvements which only benefit the landlord.

5. Status of alterations

• The landlord may insist that you remove all alterations when the lease ends. Don’t agree this if your alterations will permanently benefit the premises.

• Agree that minor alterations don’t require formal approval.

6. Conditions of transferring or subletting the lease

• Insist that the landlord act reasonably when considering your request to assign the lease. The landlord’s only consideration ought to be whether the new occupier can pay the rent and observe the lease obligations.

• Try to insist upon a right to sublet part of the premises where practical, and to do so at a rent which is fair at the time of the sublease.

7. Review right to terminate

• Make sure that any break clause is not conditional on things you can’t control or which are open to debate (e.g. observance of all tenant covenants, even where immaterial). A conditional break clause creates an opportunity for a landlord to prevent termination.

8. Consider right to renew lease

• As with break clauses, make sure any renewal rights are not conditional on things you can’t control or which are open to debate. 

• Try to agree future rent where possible, or at least negotiate a cap so that you can reasonably predict rental costs going forwards. 

9. Reflect upon the end of the lease

• The tenant must hand the premises back to the landlord in the condition the lease requires. Be aware that the landlord can make a claim for failure by the tenant to hand the premises back in good condition. Be careful when negotiating the lease, particularly in relation to repair and decoration. 

When negotiating a lease for your business, too much focus on rental costs can result in unexpected and unbudgeted expenses in the future. Do not forget to read the small print before you sign any agreement. It may be a good idea to seek legal advice, particularly if you are renting business premises for the first time. 

In a tough economy, avoiding unnecessary expenses could make a real difference to your business. 

Darren Donnithorne is a Senior Associate at Marshall Diel & Myers Limited and the Head of the Property and Estate Planning Team. A copy of this article can be found at the firm’s website at www.law.bm. 

This column is for general guidance only. It should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer. 

Today’s is the second in a series of articles by Marshall Diel & Myers.