Making Sense of Commercial Leases

Taking on a commercial lease can be a significant undertaking, especially for a small business, and there can be a lot to understand before signing on the dotted line.

Typically, a business owner intends to grow their company, in terms of revenue, production, and head count.  This growth must be considered when looking at premises, and so should the rate of that growth.  In some cases, a short-term lease of a couple of years may seem like a sensible option, though this might bring downsides beyond the relatively high rent cost that landlords impose due to the increased frequency of tenant acquisition, negotiation, and so on.  From a tenant’s point of view, if the building requires customisation, especially in industrial or technology units, the cost of construction or installation makes short-term leases less attractive and more costly on a per-month basis.

A landlord is less likely to be open to negotiation over the terms in a short-term lease as the costs of finding tenants, negotiation, creating agreements every couple of years affects income.  These hurdles, of course, also apply to the tenant, who will likely be going through similar processes again in a short space of time.

Landlords are generally more comfortable with standard or long term leases.  A standard term is usually understood to mean a lease of three to five years, and leases of such terms offer the tenant a good balance of flexibility and security.  While there may be limits on what can be done to customise the premises, the landlord may be more open to negotiating on the terms of the lease and, if your business does go through significant changes (either positive or negative) there may not be a long period remaining on the lease, so you may be able to move to more suitable premises without too much financial impact.  Exiting a fixed-term lease early can be difficult unless you can reach an agreement with the landlord, otherwise you could find that you’re required to meet the full obligations of the lease even if you have left the property.

There are several different types of lease, and each has advantages and disadvantages in terms of flexibility and cost.  The most common, though, is the Net Lease, but there are variations of this that you may come across.  It’s likely that the type you’ll be offered is known as a Double Net Lease.  This type of lease is particularly favoured by landlords as they pass some of the costs of owning commercial property to the tenant.  In addition to the rent, the tenant becomes responsible for property taxes and some insurance premiums, as well as utilities, such as energy supply, broadband, and so on.

Generally, a landlord will attempt to avoid responsibility for making repairs to a property, passing this responsibility to the tenant.  It is important that before taking on a lease you are comfortable with the state of the building and, where it appears that repairs are necessary at the start of your lease, that you leave the building in no worse state, otherwise you may become liable for repairs to damage or wear that were apparent before your lease commenced.

Entering a commercial lease must be given the same consideration as any other contract, so engaging the services of a professional at the outset can help you to avoid pitfalls that occasionally beset tenants.  To discuss how Aughton Ainsworth can assist, please contact Andy Williamson at andywilliamson@aughtonainsworth.com, or John McMuldroch at johnmcmuldroch@aughtonainsworth.com.