The Lifecycle of Renting Business Premises
All businesses need premises in which to operate whether that is a home office, a 1000 sq ft commercial office, a retail unit, a 50,000 sq ft industrial shed or something in between. Whether you are searching for your first rented premises or looking to upsize or even downsize, business premises bring with them various costs and liabilities. It is important to ensure that you understand these before you commit yourself.
It is also important to spend some time researching what is best for your business – would a serviced office be better initially or do you want to lease your own space? Once you have considered this, the next step is to find suitable premises. Although you will have to pay fees if you use a local agent, their local knowledge can be invaluable in finding the right premises for you at the right level of rent.
Once you have found a property that you like and your offer has been accepted the Landlord or its agent will put together Heads of Terms (“HOTS”), setting out the main terms of the letting which the Landlord’s Solicitor will then use to draft the Lease. Although these are not legally binding, it is important to understand what these mean and what obligations flow from these, as they will form the basis of the Lease.
In this series of articles our commercial property team look at some of the key issues to consider both at the initial stages of agreeing HOTS and during the Term of the Lease.
- Heads of Terms – what are they and why are they important?
- Repair – FRI/IRI/SOC – what does it all mean?
- SDLT – not just a tax on residential property.
- Alterations – what you can and can’t do when fitting out a rented property.
Heads of Terms – what are they and why are they important?
The parties will agree heads of terms which is a document setting out the principle terms of the lease and is usually agreed between the landlord and tenant direct or their respective agents before solicitors are instructed. Although the heads of terms are not legally binding, it may be difficult to amend these once they have been agreed and therefore it is important that you understand what you are agreeing. If you have used an agent, they can help advise on these, including any incentives (for example rent free periods) and any security the landlord may require (a rent deposit or guarantor). The Heads of Terms will also set out the term and whether there will be any right for the Tenant to bring the Lease to an end early; the extent of your repair liability; whether any rent free should be offered to reflect your fit out period and what rights you might have to assign or underlet the Lease or premises if it becomes surplus to your requirements. Ideally, you should also instruct a solicitor at this stage who can review the draft heads of terms before they are finalised and advise you on any potential costs and liabilities that you might not be aware of.
Read the full HOTS article here.
Once Heads of Terms are agreed, Solicitors will be instructed. Here at Moorcrofts we always like to visit the property with the client so that we can better understand their practical requirements in relation to occupying. This also gives us an opportunity to meet the client and also to view the property and or estate as a whole which assists in our Title Investigation and Lease negotiation.
Repair – FRI/IRI/SOC – what does it all mean?
We would always advise that a survey of the property carried out, irrespective of whether the Landlord has advertised the property as being recently refurbished and irrespective of the perceived condition of the property as there may be underlying defects which are not apparent from a visual inspection which should either be remedied by the Landlord prior to the Lease being entered into or excluded from the Tenants repair liability. We work closely with a number of surveyors in the local area and beyond and are able to refer you if required. There is a common misconception amongst Tenants that their repair liability only extends to keeping the property in the condition it is in at the date the Lease is entered into. However, unless specifically stated in the Lease this is not correct. Most Leases will require the Tenant to keep the property in “good and substantial repair condition” which actually requires the Tenant to remedy any disrepair below this standard. At the end of the term of the Lease, you will have to hand the property back in this condition and you will also have to remove any alterations that you have carried out during the term. Again, Tenants are often surprised by this given that their alterations may well have improved the condition of the property but the Landlord will want the property back clear of any business specific fit out so that it is able to re-let immediately to another Tenant who may have substantially different requirements as to the fit out. It is sometimes possible to agree with the Landlord that the repair liability is limited by reference to the condition that the property is in at the date the Lease is entered into. If so, the Tenant will prepare a schedule – usually a schedule of photos together with narrative identifying any defects for the Landlord’s approval. This can be a simple set of photos or a surveyor can be appointed to deal with this.
Read the full Repair – FRI/IRI/SOC article here.
SDLT – not just a tax on residential property
Once the Lease has been agreed and completed you will be free to start occupying the property. It often comes as a surprise however to Tenants that there is a financial liability owed to HMRC when taking a Lease of business premises. Much like when you purchase a house, SDLT is payable on the value given. In the case of a lease this is based (approximately) on the total of the rent over the term of the Lease (subject to a threshold of £150,000) and is payable at 1%. This has to be paid within 14 days of completion of the Lease and a land transaction return has to be submitted to HMRC as well. Here at Moorcrofts we are able to assist you in filling out the form and making the payment.
Read the full SDLT article here.
Alterations – what you can and can’t do when fitting out a rented property
There will hopefully be little need to refer back to the terms of the Lease throughout the term, however there are certain situations where you may need to, for example, if you want to carry out alterations to the property. The terms of the Lease will set out what is permitted and whether the Landlord’s consent is required and any requirements will need to be strictly adhered to. Whilst in practice many Tenants will approach their Landlords direct to request consent to carry out alterations, there are formal requirements set out in the Lease and if these are not followed, the Landlord is not under any obligation to consider any request. We would therefore always advise you to seek legal advice as to what is required and here at Moorcrofts we are able to summit a formal application for consent to alterations on your behalf. This triggers a requirement for the Landlord to not unreasonably delay considering such application. It is likely that you will have to pay the Landlord’s legal fees for any such application (this will have been set out in the Lease) which will include the Landlord’s legal costs for drafting the relevant licence for alterations (consent) and any Surveyor’s fees, should the Landlord need to seek their advice in relation to the proposed alterations.
About Moorcrofts Commercial Property Team
At Moorcrofts we appreciate that once suitable premises have been found, your main concern will be to move in as quickly as possible to ensure continuity of trade. Our team of commercial property lawyers is experienced at investigating and negotiating to minimise the risks and progress the transaction on your behalf. Moorcrofts Commercial Property team are also here for you throughout the whole of the life cycle of renting business premises and we are always on hand to answer any questions with regard to your rights and obligations and those of the Landlord during the term. We aim to be your first point of call if you have any queries and if we cannot deal with them ourself we aim to refer you to a relevant property professional (surveyor, planning consultant, fit out contractor) who will be able to assist, leaving you free to deal with the day to day running of your business.
Contact us
Our commercial property lawyers are renowned for their high level of service and sound practical advice. For an initial consultation, please get in touch with our Commercial Property Team.