In this blog, Laura Marszalek, a Surveyor with Cheltenham based Chartered Surveyors KBW gives some handy tips to anyone considering acquiring their first leasehold premises.
Acquiring your first leasehold business premises can be a daunting experience. Sometimes just the terminology can be confusing but I am here to shed some light on the world of commercial property and provide advice for all new business owners out there who are ready to take that next step.
By the time you start looking for premises, you will have a pretty good understanding of what the property needs to do for your business. Do you need prominence? Do you need open plan space? Do you need parking? Do you need room to grow in a short space of time? It is always useful to start with a list of must haves and desirables, much like you would in looking for a new home. Don’t be afraid to think outside the box to find what you need as commercial property varies hugely. There are many property portals out there to begin your search, but registering with local agents, such as, is the best place to start.
Once you have found the right property, this is where the negotiation starts. So, let’s look at some of the main topics for consideration when you are agreeing a deal:
Commitment (lease length, duration, term, etc.)
Typical lease lengths have reduced over recent years. It is not unusual now for landlords to consider lease commitments of 5 years upwards, sometimes less. This can vary between types of property and often reflects how much initial investment would go into a property. For example, if you are looking for a restaurant premises you probably want to secure the property for 10 years or more as the fit out costs can be substantial. The benefits of a longer lease include more security, the ability to write off initial capital outlay over a longer period and less frequent legal and professional fees. You may also be able to agree more competitive rental terms and incentives for a longer commitment. Sometimes the landlord may ask for a longer lease but will allow a tenant the right to break the lease earlier.
Break clause
A break option can be beneficial of course, if business circumstances change expectantly in the future and the lease becomes an unwanted liability. For example, you may outgrow the premises sooner than expected or the business may not achieve its targets due to unforeseen events. Exercising a break notice is not always a straightforward procedure however. Notices need to be served in good time and sometimes may be subject to onerous conditions under the terms of the lease which have to be complied with in order for a break clause to be legally valid. A break clause might also be subject to a rent penalty, typically if the tenant has benefitted from an initial rent incentive on lease commencement.
Rent and incentives
Negotiating the rent is often difficult and requires a good understanding of the local market. For many this will be one of the biggest expenses for the business, so it is extremely important for the business to assess its affordability prior to negotiations. In your conversations with the agent you could try and gauge how much interest there has been and how long the property has been on the market, this may indicate if there is any flexibility on the asking rent. Remember to check whether VAT is payable and also ask whether there is a service charge or other costs to pay on top.
I’ve already touched upon rent incentives in mentioning the penalty payment on a break clause but typically a penalty on a break would be to compensate the landlord granting a rent incentive at the beginning of the lease. The intention of a rent incentive is to help a tenant fit out a property before they are able to start trading. Rent incentives can vary greatly and may take the form of rent free periods, reduced rent periods, stepped rents and sometimes capital contributions. Most landlords will be cautious about giving upfront rent free periods to a start-up business as a result of the perceived higher risk. Other factors will be taken in to consideration however, such as the tenant’s initial investment level, the availability of a rent deposit and any personal guarantees, and a credible business plan of course. Usually a landlord would prefer a tenant to take on the property ‘as is’ without the landlord being required to carry out any works, as it generally makes a transaction much simpler.
Repairing liability
For commercial property lettings, it is common for a tenant to take on responsibility of repairing the property as a whole. You will need to be clear on what your responsibilities are for repairing and maintaining the property. Even if the landlord takes on responsibility of organising works (usual for multi-let properties), the cost is usually recovered from the tenant under a service charge. It is important in this respect to be aware of the condition of the property from the outset. We would recommend a pre-acquisition survey (available through KBW) to assess the condition as at commencement, but we can also advise what works may be required in the future so you go into any letting with your eyes open.