Moving your business into a new home – points of consideration for taking your first commercial lease

For lots of start-ups, a key consideration will be whether to make an investment into property. The agile nature of start-up businesses lends itself to considering short and flexible commercial terms whether that be within a serviced building or office workspace.  Below are some key points to consider when you are looking for your first commercial lease:

1. A way out

The ability to exit your lease early will much depend on the terms of your lease. For a start-up company (particularly one in a new and/or unproven market), you may wish to seek a short lease containing a right for you to break the lease at a certain point or points during the term. You should also ensure that the alienation provisions allow for easy and straightforward assignment, subletting and occupation sharing. Taking a commercial lease is a big commitment; if you need to react quickly to any change in your business or sector, flexibility will be crucial – allowing you to bring your lease to an end before the end of the contractual term or the ability to assign or subletting without difficulty could be your saving grace.

2. Camera ready

A photographic schedule of condition of the property is a good idea and should be agreed with your landlord prior to the lease being entered into.  It would mean that, at the end of your lease, you will not have to put the property back in any better condition than what is shown in this schedule.  This could be financially beneficial to your business because returning the property to your landlord under normal repair and decoration provisions can cost thousands of pounds.

3. Limit your outgoings

If you are taking a lease of an office in a building or a shop within an estate, service charge costs (for example, maintenance of the common parts of the building or car park or providing security for the building) can be a huge expenditure. It would be worth negotiating with your landlord a service charge cap so that you have some certainty on this level of expenditure, particularly as this does not take business rates into account or any stamp duty that you may need to pay. One of the obvious benefits of a shorter term is that there will be less stamp duty payable because the tax is calculated on the aggregate of the term of the lease using the first five annual rents.

If your landlord will not agree to a capped service charge, make sure you find out what previous years’ service charges have been.

The landlord’s reaction

The above points could come at a price in negotiations with your landlord.  Any break clause negotiated in favour of your company may mean that the landlord demands a mutual break clause (which, if exercised, could cause major disruption to your business). Any cap of service charge may fall on deaf ears in case the building or estate where you are taking the lease is in need of repair.

Beware that landlords will likely require a deposit of six months’ rent (or more) which will need to be replenished after any withdrawal by the landlord in the event you fall behind in payments under the lease. This means significant capital may need to be ring-fenced for the lease to be entered into.  Landlords may also require personal guarantees from a director or directors of the company so that they have an additional layer of security in case the start-up does not work out and arrears are left owing even after any deposit is used up.

But, in this current market, landlords appreciate that all tenants are being driven by a need to be flexible; given uncertainty with the economy and the pandemic, tenants are keen to avoid long-term financial commitments. At the same time, landlords are keen to have their premises occupied with insurance and service charge taken care of by ambitious tenants, so perhaps now is the time to strike a deal.

If you have any queries about this topic, please contact our Property team. For more information about our legal services for start-ups and new businesses, please click here.

 

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