It is quite common for people to take a lease of a commercial property without knowing what is involved. Considering some basic points when agreeing terms with the landlord may avoid future issues. Here are few pointers to think about before you enter into a new lease.
Company or Personal?
Should you have the lease in the company name or in your personal name? Becoming a tenant with a lease means you are taking on liabilities and may be promising to do certain things. What happens if the lease is in your personal name and if you are unable at any point to meet the obligations? A typical example is not being able to pay the thing that was your responsibility. What happens if you fail to keep the property in good repair? The bottom line is that the landlord can look to you personally to pay the costs. Ultimately, the landlord can look at your personal assets as a away to recover its losses.
If the lease is in the name of the company, you should, in theory, be able to limit your personal liability. However, even if the lease is in the name of the company, this may not in itself be sufficient to avoid personal liability. The landlord may, in such case, insist on having you personally act as a guarantor under the lease. If the company then defaults, the guarantor has to step in and fulfil the duties of the tenant and pay the rent and other charges. However, if your company is the tenant, the landlord must first look to the company for payment before it can pursue the guarantor.
Often, especially where there is a company, the landlord may ask for a rent deposit. This may be equal to a number of months’ rent, usually 3 or 6. Rent deposits are recorded in a separate document called the rent deposit deed. The rent deposit is held by the landlord in a separate account. If you default in paying the rent or service charges or the landlord incurs other costs, the landlord can deduct the sum of money out of the rent deposit to cover those charges. You will, however, be required to keep the deposit topped up to the initial amount at all times. Failure to do so means you will be in breach of the terms of the lease. At the end of the lease, if there are no outstanding amounts owed to the landlord, the landlord will refund the money to you with interest.
Length of lease
You should consider the length of the lease. If you are running a new business, then you may want a short term lease, such as 5 years. If it is a longer term lease, such as 10 years, you should consider asking a for a break clause. This means that at some set time you can exercise the right to bring the lease to an end early. For example, if the business is successful you may need larger premises. You might also find yourself unable to pay the rent!
Repair and Insurance
Commercial leases are known as Full Repair and Insurance (FRI) leases which most people don’t realise that as the tenant you are responsible for keeping the property in good repair, or good and substantial repair and condition. The tenant’s responsibility to maintain the premises it occupies. The landlord is responsible for maintaining the common parts (subject to a contribution by the tenant.) This means that when the lease comes to an end, you have to return the premises as you found it. If you do not, the landlord can carry out any works of repair and charge you for dilapidation costs. My advice, get survey done for any lease longer than 3 years. This way you know what is wrong with the premises from the outset. If the premises are not in good condition, you should consider asking the landlord to agree a schedule of conditions. This usually involves having a professional surveyor taking photographs of the premises. He will also prepare a detailed schedule of the condition of the premises. The schedule becomes part of the lease. When the lease ends, you have to hand back the property in the condition it was at the start. A FRI lease also means that the landlord will insure the building. You will be required to pay contribution towards the premium. The amount you pay will depend on the size of the premises you are occupying.
Think about your obligations in commercial lease is that you own the premises for the duration of the lease. You should maintain the premises as if you own them. You are more likely to deal with maintenance issues as they happen. The result is that you avoid receiving a large dilapidations bill from the landlord.
If you would like expert advice on commercial leases please contact me, Shakeel Mir on 020 3150 1919 or email me at firstname.lastname@example.org