We recently held a series of ‘Elevator Briefings’ for members of the Edinburgh Chamber of Commerce. To ensure maximum time for networking (and wine) by the attendees, we spoke for no more than 5 minutes and gave our '5 Top Tips for Lease Negotiations':-
- 1) Maximise Flexibility
The commercial world is volatile at the moment and your circumstances may easily change over the 2, 3, 5 or 10 year course of a Lease but that does not mean you can’t insert clauses to protect yourself against the worst if this were to happen.
Landlords are much more amenable to shorter lease terms, break options and renewal options, stepped rents and rent free periods and tenants should certainly be considering asking for these where they would be of benefit.
Similarly, the market is not going to be down forever, so landlords should not be quick to tie themselves to long leases at current low rent values. They should be thinking about break options and rent review clauses to allow them to renegotiate terms in the future.
- 2) Limit Liability
Clients will often ask us why we spend so long reviewing and reporting on the service charge provisions in leases. After all, the landlord has produced a service charge budget and everyone is happy with the figures.
Unfortunately, the service charge can be an unexpected source of dispute and expense, especially if you have not considered what can and can’t be included. We recently had to break it to a tenant who had signed up to a lease without legal advice that, yes, they were going to have to contribute £120k to a new air conditioning system for a building they were due to move out of in a week’s time.
Tenants should be looking to either restrict the things which the landlord can include in the service charge to a set list and resist ‘catch all’ provisions or insist on a list of exclusions or a cap on their contributions.
On the other hand, Landlords will want to be careful that they are not left with a bill for items which are for the benefit of their tenants because they do not have the right to recover under their Leases and should be sure to specifically include items which they know they will or may be likely to incur in the future.
- 3) Internal v External
Agents like to throw around the phrase FRI without necessarily explaining to their clients what it means. FRI stands for Full Repairing and Insuring and an FRI lease is one where the tenant is responsible for maintaining and repairing (and potentially rebuilding) the whole of their premises, internal and structural. These leases are not always appropriate or reasonable - a tenant, especially in the current market, should perhaps not be liable for huge roof repairs where they are only entering into a short lease of 1 or 2 years or where the building is in multiple occupancy.
In such cases, tenants should be asking for an internal repairing obligation only i.e. they are responsible for the decorative finishes, carpets, internal and non-structural walls, but responsibility for the structure of the building remains with the landlord.
- 4) Think Practically
Although that gorgeous New Town office has excellent views of the Castle, does it actually meet your business requirements? Tenants should consider at a very early stage what changes they may need to make to a property and whose consent may be required to those changes (be it landlord’s consent, planning permission, building warrants or otherwise) and be absolutely sure that they can get those consents before they sign a lease.
They should also consider more simple matters - does the property meet your IT requirements? In the increasingly online world of business, having premises which do not have WiFi/ broadband may be an unexpected deal breaker.
- 5) Take Advantage of Due Diligence
Finally, although it may seem like a costly and time consuming process, carrying out due diligence can be invaluable in highlighting problems with the premises before you sign on the dotted line. It can also provide insight into the type of landlord you are dealing with. If, for example, they are quibbling about spending £20 to get you a property search how are they going to be when it comes to spending money on maintenance and repairs?
Each of these suggestions could easily provide enough subject matter for a blog in its own right, but if you are thinking about entering into a Lease and want some advice as to what you might want to consider in your Heads of Terms to make the most of your position, please do not hesitate to contact us.
0131 226 8224