When a landlord and tenant begin the negotiations for a new commercial lease, each party will have different objectives.
The landlord will want a secure income stream and confidence that the property will be left in good condition at the end of the lease. The tenant wants freedom to run the business without interference, to control costs as much as possible and to have some flexibility if their needs change.
While there are numerous points to consider when negotiating a commercial lease, here are five key points to consider from both a landlord and a tenant perspective:
1. Rent free period
Landlords will often agree to a rent-free period at the start of a new lease as an incentive to the tenant. This could provide valuable breathing space to get established in new premises, especially if the tenant needs to spend money on fitting it out to their requirements. In order to secure good tenants, it is well worth considering offering a rent-free period.
2. Break clauses
Commercial leases are granted for a fixed period and unless a break clause is negotiated, they cannot be broken earlier. There may be a one-off right to end the lease, for example at the end of a particular year of the term; or a rolling break right may be negotiated in favour of the landlord, the tenant, or both parties, which can then be utilised at various points during the lease.
The landlord may wish to impose conditions that must be satisfied before a tenant can break the lease, for example complying with all of your obligations up to the break date. The tenant will want to try to limit this to paying any rent due and leaving the property empty.
3. Repairing and altering obligations
The usual starting point is that the tenant must keep the premises in good repair, this means they would have to maintain it and fix any damage unless it was covered by the landlord's insurance. If the premises is not in a great condition to start with or the tenant is taking a very short lease, the tenant could try to limit their obligation to keeping the property in no worse state than they are in at present. The landlord and the tenant would then agree a schedule of condition, with photographs and written details, which can be used as a benchmark later.
The lease will usually prohibit structural alterations, but there is often the right for the tenant to make internal, non-structural alterations. Consent may be required for the tenant each time, although often consent is not necessary as long as the tenant keeps the landlord informed of any alterations. It is best for the landlord and the tenant to negotiate any necessary alteration at the heads of terms stage.
4. Rights to transfer the lease to someone else or to sublet the property
Most leases allow the tenant to transfer the lease to another business or to sub-let, but only with the landlord's consent and from a commercial perspective, a tenant will want as much flexibility as possible should they no longer want or need to occupy the premises. By law, the landlord must act reasonably but they are allowed to impose conditions setting out when they may refuse consent. The tenant will try to limit these conditions to being up to date with the rent, and the new tenant or subtenant being financially strong enough to take on the lease obligations. In some cases, it may be reasonable for a landlord to request a tenant to enter into a statutory guarantee that if the new tenant does not meet the lease obligations, the outgoing tenant will do so.
5. Obligations at the end of the lease
The landlord will want the tenant to leave the property in good condition, so it can easily be re-let. If the tenant has made any alterations during the lease, the starting point is that the tenant will have to remove them. It is worth discussing this when negotiating the lease, because it may be beneficial to both parties to leave some things in place. This could save the landlord, the tenant and a future tenant money, while also reflecting a more sustainable approach by avoiding materials being wasted.
When reviewing a lease, it is important not to consider each clause in isolation but to think about what both the landlord and the tenant are trying to achieve and how all the clauses impact and interrelate with each other. The negotiation points covered above are not intended to be definitive or exhaustive. Negotiations between the landlord and the tenant will depend on the nature and extent of the particular property, the length of the term of the proposed lease, the particular tenant's business needs and the relative bargaining positions of the parties. Therefore, there are likely to be other matters that are bespoke to the particular transaction that will need to be taken into account.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
