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Taking on a new lease can be an exciting time for you and your business. But negotiating the basic terms of the lease – also known as ‘Heads of Terms’ – can become quite overwhelming.
While Heads of Terms in themselves are not legally binding, we would always recommend that you seek legal advice on the terms being placed before you agree to them. Here are our top five matters to consider when negotiating Heads of Terms:
Repairing Liability
Most landlords will want you to take on a ‘full repairing and insuring lease’. This means the landlord will insure the property and recover the premium from you by way of an insurance rent, and you will covenant (legally promise) to keep the property in good and substantial repair and condition throughout the lease term.
Any damage, wear and tear or general disrepair will be your responsibility, and you will need to repair these damages at your own cost. If the property is looking a little run down you may want to request the repairing liability being limited to a Schedule of Condition. This will be a photographic document annexed to the lease documenting all damage in existence. The lease will then be amended to state that you are not responsible for putting the property into any better condition than as evidenced by the Schedule.
Should you provide a rent deposit or a personal guarantee?
Some landlords may try to obtain both but you should always resist this. One of these is more than enough security and which one you agree to greatly depends on your personal circumstances. If you’re able to place a six month rent deposit down on completion, then that may be a more attractive and sensible option than providing a personal guarantee.
A personal guarantee would mean that if the tenant company were unable to fulfil the obligations of the lease (paying the rent, complying with the covenants etc) the landlord could insist that you take on these responsibilities for the remainder of the lease term. This could turn out to be quite a burden if the lease term was to run for a considerable length of time.
Rent Review – open market or Retail Prices Index?
An open market rent will reflect the value of the property on the open market at the time of review and will provide an accurate reflection of what the landlord would reasonably receive if they were to re-let the property on that date. The Retail Prices Index (RPI) is a measure of inflation and can fluctuate with each month. Each approach comes with its own benefits and disadvantages – an open market rent would provide a higher rent in times of a property market ‘boom’ but an RPI rent would also increase in times of high inflation.
Careful consideration should be given to both approaches. These can be controlled to an extent by the inclusion of ‘cap and collar’ definitions, meaning that the rent can never be more or less than an agreed set figure.
Service Charge Caps
If your property is within a wider building or on an estate, you may be subject to service charge payments. For example, in respect of the landlord maintaining and repairing the communal areas, providing utilities and security to the site, and for works on the main structures of the buildings.
If a large renovation or repair is required, your costs could increase significantly and we would strongly recommend that you not only make enquiries with the landlord of any upcoming works, but also view previous years’ service charge accounts so you can plan accordingly. If future works are planned or you can see frequent significant increases in the service charge, you may want to request that your contribution will be capped.
Security of Tenure
Do you want to stay on at the property after the end of your lease and negotiate a renewal while retaining the property and continuing your business? If so, request that the lease is included within the Landlord and Tenant Act (1954). This would mean that unless the landlord serves a formal notice to you (and they will only be permitted to do so for very specific reasons) then when your lease comes to an end you can remain at the property and negotiate a new lease on very similar terms to your current terms of occupation. If the lease is excluded from the Act, you must immediately vacate the property and return it to the landlord when your lease ends.
If you would like to discuss the above or any proposed terms you have been provided with, please get in touch with a member of our Commercial Property Team or call 01329 822 333.
