FAQ: Leasing premises FAQs
24 FAQs people ask about leasing premises
- What is the difference between a lease and a licence?
- Do I need a survey when I lease premises?
- What initial costs will I pay when taking a lease?
- What ongoing costs do I need to look out for?
- What service charges should I expect to pay?
- Will I need to insure premises I lease?
- What is the situation if the premises are currently occupied?
- Will the lease include the contents of the premises?
- Do I need to check the lease myself or can I leave it to my lawyer?
- What rights do I need the lease to include?
- What restrictions should I look out for?
- What is a break clause and what should I look for?
- What do I need to look out for when I purchase a lease from an existing tenant rather than a new lease from the landlord?
- What do I need to look out for when I sub-let a property from a landlord who owns a lease rather than the freehold?
- How do rent reviews work?
- Will I be able to get out of the lease if I no longer want the premises?
- Will I be able to sub-let part or all of the premises?
- What liability for maintenance and repairs will I have?
- How can I negotiate a better deal?
- At what point in the negotiation does the deal become legally binding?
- How long does it take to finalise a lease agreement and can I prevent the landlord from accepting other offers in the interim?
- Can I use a lease as security for a bank loan?
- What happens if I discover a major problem (eg a structural problem) after I have taken a lease?
- What happens when the lease expires?
1. What is the difference between a lease and a licence?
In practice, the term licence usually refers to a relatively flexible, short term agreement. Licences should be for less than six months, non-exclusive, and be terminable at short notice (say one month) by either you or the 'licensor', to avoid being treated as a lease (see below). Licence agreements usually have a low initial cost, perhaps a deposit equivalent to one month's rent, whereas lease costs can be significantly more.
Typical licensed premises include small office units or workshops within a larger building, and often include various support services (such as reception and security).
Legally, what matters is not whether an agreement is referred to as a licence or as a lease, but what the agreement actually says. Although many licences are relatively straightforward, you still need to satisfy yourself that you understand your rights and obligations before entering into any agreement.
2. Do I need a survey when I lease premises?
A survey will help to ensure that the premises are in good condition and suited to your purposes. Even if any repairs will be the landlord's responsibility, problems (and any necessary remedial work) could interfere with your business. Any adverse results from a survey can also be used as part of your negotiations.
Leases generally give you some or all of the responsibility for maintaining and repairing the premises, or even for reinstating them to their original condition. In these circumstances, a survey is essential.
If you are taking a short term licence on office space where you will be responsible only for internal condition, you may feel that a visual inspection is sufficient. Even so, it may be worth investing in a photographic survey to provide evidence of the premises' original condition in case of any future dispute.
Owners letting a commercial property must provide an Energy Performance Certificate (EPC), giving a rating of the energy efficiency and carbon emissions of the building. EPCs are produced using standard methods, with standard assumptions about energy usage, so that the energy efficiency of one building can easily be compared with another similar building. The aim is to help you consider energy efficiency and fuel costs as part of your investment. Read about EPCs for commercial premises on the GOV.UK website.
3. What initial costs will I pay when taking a lease?
Initial costs typically include:
- Any lease 'premium' (the purchase price).
- Your own legal fees. The landlord will often want you to pay their legal fees, though you may be able to negotiate on this point.
- Other professional fees - for example, the cost of a survey.
- Stamp Duty Land Tax.
- Land registry fees of up to £700.
- Any security deposit you are required to make - again subject to negotiation.
- The first period's rent. When taking a lease part way through a rent period, this initial payment may need to cover both the unexpired portion of that period and the whole of the next period.
Taking a simple licence is generally less expensive, with initial costs restricted to your legal fees, an administrative charge to cover the landlord's costs, and any deposit you make. Depending on the amounts involved and the way the transaction is structured, there may also be VAT implications for the premium and/or the rent which you need to understand.
4. What ongoing costs do I need to look out for?
The two major costs are the rent (or licence fee) - typically payable quarterly in advance - and the rates (non-domestic rates). As a rule of thumb, you can expect rates to be something in the region of 40% of the rental value of the property. Other costs you should be aware of can include:
- A service charge (particularly where the premises are part of a larger property or include additional services).
- Building and other insurances.
- General running costs - for example, any utilities you pay for directly, and the costs of any repairs and maintenance for which you are responsible.
5. What service charges should I expect to pay?
Any service charge should reflect communal services which are provided by the landlord rather than being paid for directly by you. These might include such things as reception, security, cleaning, car parking facilities, utility bills and maintenance costs. Insurance is usually handled as a separate charge. In general, the service charge is likely to be higher (in relation to the rent) for shared premises such as serviced offices.
You should check how the service charge is calculated, and investigate whether there is scope for the landlord to overcharge you. You may want to ask to see copies of previous service charge bills.
There may be scope to negotiate a cap on service charges, or to eliminate some elements altogether. A particular point to watch out for is any payments into a 'sinking fund' for future major repairs; you will certainly want to avoid such payments if your own use of the premises will only be for a short term. Or if there is no such fund, you want to avoid the landlord having the right to charge you for improvements - such as the cost of replacing all the windows in the building when you would prefer to keep the old ones.
6. Will I need to insure premises I lease?
The lease should state who is responsible for arranging and paying for buildings insurance. With most leases, the landlord arranges and pays for buildings insurance but then passes on the costs (or an appropriate proportion, in shared premises) either as part of the service charge or as a separately itemised charge. You can ask to see a copy of the cover to ensure that it is adequate and in line with what you are being charged.
You would usually want to arrange other insurances - for example, to cover contents, and employers' liability insurance. Even where the landlord arranges building insurance, you may want to ensure that your own insurance includes cover for any losses from business interruption caused by problems with the building.
The landlord will usually also insure against loss of rent and, again, will pass on the cost. This means that if the premises are damaged and you are unable to use them, you will not have to pay rent until the damage is repaired.
7. What is the situation if the premises are currently occupied?
Your solicitor should ensure that any offer you make, or contract you sign, includes 'vacant possession' - ie that any current occupant will move out before the completion date. You should also ensure that the contract includes arrangements for putting the premises in good order before you take over - for example, clearing and cleaning the premises.
8. Will the lease include the contents of the premises?
Fixtures and fittings - for example, toilet fixtures and light fittings - are generally included within the lease. Ensure that the agreement clearly lists any items where there might be any uncertainty as to whether they are included.
Equipment may be included as part of the deal, either within the lease or as a separate part of the contract. Confirm that the equipment is owned outright by the vendor and is not subject to a hire purchase or leasing agreement. You may want to check the service records and any warranties for appliances like boilers or air conditioning units.
Short term licences generally do not include the purchase of any contents, but may specify contents which will be provided and which you will have the right to use - for example, office furniture in serviced office space.
9. Do I need to check the lease myself or can I leave it to my lawyer?
You should check the lease yourself. Even if you have briefed your lawyer properly, reading the lease might point up practical issues of which your lawyer is not aware, or help to clarify your own thoughts on what you want.
By asking your lawyer to explain any parts of the lease which you do not understand, you will also ensure that you have a clear understanding of the rights and obligations which you will be agreeing.
10. What rights do I need the lease to include?
Your basic rights under the lease should include:
- access to the premises
- the benefit of any services (such as lighting, heating and cleaning)
- use of shared facilities (such as toilets or specified parking spaces)
- the right to hang signs (such as your name plaque)
You need to check that these rights suit your business requirements. For example, a retailer would need to ensure that the right of access includes access for deliveries, and that the business would be permitted to post significant signage rather than just a small plaque.
The lease should also state the extent to which you are (or are not) allowed to make alterations to the premises. For leased (rather than licensed) premises, you would normally expect to be allowed to make internal non-structural alterations (though you might be required to reinstate the premises at the expiry of the lease).
11. What restrictions should I look out for?
There may be restrictions on what business you can use the premises for. (Bear in mind that the use to which you put the premises will also be limited by planning permission.) The lease may also specify restrictions on sub-letting part or all of the premises, or assigning the lease to a third party.
12. What is a break clause and what should I look for?
A break clause is an option for you and/or the landlord to terminate the lease early. For example, you might negotiate a 20 year lease on the premises, but with the option to terminate the lease after four years if you choose to.
Key considerations include:
- Whether the break clause gives you the flexibility you want. In the example above, after four years you will no longer have the right to break the lease for the remaining sixteen years.
- What notice you need to give if you want to exercise your right to terminate the lease.
- Whether there are any penalties attached to exercising the break - for example, a break payment.
- Whether there are any other conditions attached. Commonly, leases give the landlord the right to refuse to allow the break if you are in breach of the lease in any way, however minor.
You should be wary of any break clause in favour of the landlord, which could allow the landlord to terminate the lease early against your wishes.
13. What do I need to look out for when I purchase a lease from an existing tenant rather than a new lease from the landlord?
It is obviously essential to confirm that the original lease gives the tenant the right to assign (sell) the lease. You should also be aware that the lease may give the landlord some right to vet whether you are an acceptable tenant - for example, to check that you are of equally good financial standing or to require you to provide security (eg a deposit or a guarantee) equal to that provided by the original tenant. The terms of a lease can be open to interpretation if, for example, the lease states that the landlord shall not 'unreasonably' withhold consent to assign.
While the price (if any) you pay the existing tenant will be subject to negotiation, the landlord is unlikely to be prepared to negotiate key terms of an existing lease such as the rent, the permitted use of the premises and any restrictions on alterations. This may give you less flexibility to ensure that the lease suits your requirements.
More broadly, the transaction will involve not just you and the tenant, but also the landlord. This may well lead to extra complication, delays and costs; you are likely to be asked to pay your own, the tenant's and the landlord's legal fees, though this is open to negotiation. There may also be more options as to how the deal is structured - for example, whether you are purchasing the lease or are purchasing the existing tenant's business (including the lease), and whether you are purchasing any extras such as equipment.
Pay particular attention to what liabilities you will be taking on, particularly if you will be responsible at the end of the lease for restoring the premises to their original condition - when the lease was initially granted, rather than when you take over the premises.
In practical terms, you should satisfy yourself as to why the existing tenant is selling, and take advantage of any local knowledge the tenant can provide.
14. What do I need to look out for when I sub-let a property from a landlord who owns a lease rather than the freehold?
You must ensure that the landlord has the right to sub-let, and will need to check whether the superior landlord (ie the landlord's landlord) has any right to be involved in the negotiations. You will also need to check the terms of the landlord's lease more generally - restrictions in that lease (for example, on how the premises may be used) will also apply to you.
15. How do rent reviews work?
Rather than setting a fixed rent for the entire term of the lease, most leases (particularly longer leases) include rent reviews which allow the rent to be adjusted periodically. The terms of the lease will set out how the rent reviews work, including when rent reviews will take place (eg every three years) and how the new rent will be calculated. The lease will usually also specify what notice the landlord must give you of the new rent and how disagreements will be resolved.
Most leases base the new rent on the 'open market rental value' at the date of the rent review - ie the rent the landlord could reasonably expect to receive if the premises were leased on that date to a third party, on similar terms to those in your lease. Some leases link the new rent instead to the Retail Price Index.
Key pitfalls to look out for in the lease's rent review terms include:
- An 'upward only' clause. This states that if the open market rental value has fallen your rent will remain at the same level rather than falling as well.
- Low initial rent. Agreeing a low rent for the initial period of the lease will not protect you from a steep increase at the first rent review date if the lease specifies, for example, that the new rent will be at open market value.
- Improvements. The rent review agreement should specify that the new rent will not reflect the value of any improvements you have made to the premises.
Appropriate professional advice can be invaluable for negotiating the rent review terms of the lease and the initial rent, and also for negotiating the new rent at the time of each rent review.
16. Will I be able to get out of the lease if I no longer want the premises?
The terms of the lease will determine what options you have. These may include:
- sub-letting part or all of the premises
- 'assigning' (selling) the lease to a new tenant
- exercising your right to terminate the lease under a break clause or because the landlord has broken the terms of the lease
- negotiating the termination of the lease with the landlord - though the landlord will not be under any obligation to accept any proposal you make
It is important to understand that while terminating a lease will usually absolve you of future responsibility for the premises, sub-letting or assigning the lease usually will not. If you sub-let part or all of the premises, you will still retain all your liabilities to the landlord (and your tenant will have separate liabilities to you under the sub-lease you have agreed). Assigning the lease generally falls somewhere between these two positions, depending on the terms of the lease. You will usually still be liable to pay the rent to the landlord if the new tenant fails to do so.
Leases entered into later than 1996 can require the outgoing tenants to guarantee their immediate successor.
17. Will I be able to sub-let part or all of the premises?
The terms of your lease will state whether you are allowed to sub-let, and what conditions there are. These can include restrictions on whether you can sub-let part of the premises, or can only sub-let the premises in their entirety, or restrictions on what rent you can charge.
Bear in mind that when you sub-let, the original lease remains in force (and you have a separate sub-lease with the tenant); you retain your liabilities under the original lease. The terms of the sub-lease will be limited by your lease - you cannot, for example, grant a sub-lease which is longer than your own lease - and the landlord may have the right to approve the terms of the sub-lease before consenting to it.
18. What liability for maintenance and repairs will I have?
This depends on the terms of the lease. A 'Fully Repairing and Insuring' lease makes you liable for all maintenance and insurance costs. You will usually also be liable for alterations and repairs needed to comply with legal requirements for example, if asbestos needs to be removed or made safe or if the premises need to be made accessible for disabled people. At the end of the lease, you may well be responsible for reinstating the premises to its 'original condition' or even to renew or rebuild (or be required to negotiate a suitable payment to cover any 'dilapidations').
In shared premises, tenants are usually directly responsible only for internal repairs. Even so, you may also be liable to contribute to maintenance costs. In circumstances like these, it is important to investigate the state of the premises and what maintenance plans the landlord has, as you may end up being charged for any maintenance works.
19. How can I negotiate a better deal?
Simple licences are often offered on a 'take-it-or-leave-it' basis, with scope only to negotiate on the rent rather than the terms of the agreement. When negotiating a new lease, however, everything is negotiable (except to the extent that the landlord is limited by any superior lease).
As leases are complicated agreements, there is plenty of scope to trade concessions. How flexible the landlord is will depend on circumstances - if the landlord is having difficulty finding a tenant, you will be in a stronger position.
Make the most of your professional advisers in negotiations: they will have the experience and will find it easier to be dispassionate. As well as using your lawyer to negotiate the legal agreement, a suitably experienced chartered surveyor who understands local market conditions can advise you on market rents and other commercial aspects of the deal. The results of your survey can be a useful negotiating tool, with every defect you have identified being an opportunity to ask for a concession. 'Selling yourself' as a good tenant - by demonstrating your creditworthiness and showing yourself to be trustworthy and easy to deal with - can also help.
Your negotiating targets might include:
- reducing or avoiding any initial lease premium charged for the purchase of the lease
- an initial reduced rent or rent free period, particularly if you will need time to fit out or adapt the premises
- avoiding being responsible for paying the landlord's legal costs while negotiating the deal, or at least agreeing a cap on them
- agreeing a cap on other charges, such as any service charge
- reducing the extent of any security you are required to provide, for example by agreeing that any deposit you pay will be refundable after a set period, and particularly avoiding giving any personal guarantees
- ensuring that you have flexibility to exit the lease, through the right to assign, break clauses and so on
- minimising any restrictions on how the premises can be used or adapted
- avoiding upward only rent review clauses
- limiting the extent of the repairing obligations so that you do not have to put the premises into a better state of repair than they are at the beginning of the lease
20. At what point in the negotiation does the deal become legally binding?
All aspects of the deal will remain negotiable until you exchange contracts. At that point, the contract is binding on both you and the landlord. You pay Stamp Duty Land Tax and other fees, including any land registry fees, at the completion date when you take over the premises. If the premises are ready to be occupied straight away you may enter into a new lease without any prior contract.
21. How long does it take to finalise a lease agreement and can I prevent the landlord from accepting other offers in the interim?
Legal 'due diligence' - checking that the landlord has the right to sell the lease, investigating planning decisions and so on - can take several weeks. The whole process can be more complicated and drawn out if several parties are involved (when, for example, the landlord is also a tenant of another 'superior' landlord).
If appropriate, you may want to negotiate a 'lockout agreement' with the landlord. This prohibits the landlord from negotiating with other prospective tenants or accepting any other offer provided that you exchange contracts within a set time limit. However, this does not compel the landlord to exchange contracts with you during the 'exclusivity period', it only prevents the landlord from dealing with other prospective tenants during that time.
22. Can I use a lease as security for a bank loan?
You may be able to use a lease as security if it has intrinsic value - where you will be paying a premium for the lease. (By contrast, a lease at open market rental value with no initial premium has no value as security for a loan.) Bear in mind that, unlike freehold premises, the value of a lease as security will fall steeply over time.
If you do plan to use a lease as security, you should discuss this with your bank at an early stage and ensure that the forfeiture provisions in the lease are amended to allow the property to be mortgaged.
23. What happens if I discover a major problem (eg a structural problem) after I have taken a lease?
If you are liable for maintenance and repairs, then you usually have little redress against the landlord for such problems. Depending on the terms of the lease, you may have some right to claim compensation from the landlord (or to stop paying rent) if the problem stops you from enjoying your right to use the premises. As always, the terms of the lease are the key factor.
You might have a claim against your surveyor - or even your lawyers - if the problem is one which should have been identified by the survey (or as part of legal due diligence).
Even if your lease puts you in a weak position, there may be scope for negotiation. For example, you might be able to negotiate a contribution from the landlord towards any necessary improvements on the basis that the landlord will ultimately benefit.
24. What happens when the lease expires?
Many leases of business premises are covered by the Landlord and Tenant Act 1954, which helps protect your rights if you wish to renew your lease at the end of its term. Broadly speaking, if the lease is protected by the Act you will have a general legal right to renew the lease, unless you have breached its terms - but not if the landlord wants to sell or redevelop the premises, or move in. However, there can be financial implications: while rent reviews during the life of a lease may not have reflected the value of improvements you have made to the premises, the rent for a new lease can do so.
If, however, you do not wish to renew the lease, you may be responsible for restoring the premises to their original condition. In practice, this is usually a matter for negotiation - and, if necessary, agreeing an appropriate payment to cover any dilapidations - rather than carrying out works on the premises.
By contrast, licences are usually drawn up in such a way that they do not constitute leases for the purposes of the Landlord and Tenant Act. As part of the flexibility of a licence agreement, the landlord generally has the right to give you notice at any time, and you have no right to renew. As long as you have kept the premises in good condition without making alterations, you should have little or no liability for reinstatement.
The article above was written with considerations from Corporate Law tutors in Lancaster and Commercial Law advisors based in Wigan. In relation to the article above our solicitors who serve areas such as Southport, are able to offer expert legal advice on this subject.
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