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5 commercial lease negotiation tips
2 March 2020
Getting a good deal when negotiating a new lease for your business property is complex. Shorter leases are becoming more common, but a contract will still generally be between 3 to 5 years in length – a period which could see big changes in your circumstances.
That’s why it pays to get expert support. We work with businesses to look at the bigger picture; from the economy and local market conditions to their individual long-term business plan, so they can find the right site, in the best location and negotiate a good deal.
Here are our top five commercial lease negotiation issues and tips, whether you’re looking at a new building or renegotiating a commercial lease:
1. Know your value
Taking advice means you’re aware of your true negotiating power – to get the right deal, you need to factor in the market at large, how your business is growing and the number of other potential tenants who are interested in the property.
Most agents factor in some room for negotiation in their quote and it’s not difficult to get a small discount. But truly understanding the market can open the door to significant savings, such as long rent-free packages.
It’s also essential to consider your future business plan to ensure you do not become trapped in a contract that may not suit your business needs in the future. Therefore it’s important to make sure you have a lease negotiation strategy in place.
2. Landlord tenant negotiations – acting in the interests of the tenant
A tenant is protected by the Security of Tenure Provisions under the Landlord & Tenant Act 1954, so you have a right to renew a lease unless your landlord can prove they have good reason not to do so.
Landlords often try to remove this clause from the contract, but they can only do so if the tenant explicitly agrees. There may be reasonable circumstances for a landlord to do this, but a tenant who is committed to this type of lease should ensure they proactively renegotiate ahead of the expiry date of their lease if they wish to stay.
3. Take a break
A long-term business plan will factor in property requirements. While this offers a view of the future, it’s still wise to build in some flexibility to your lease to ensure you maintain flexibility with your property holdings.
For instance, taking a five-year lease, with a ‘break option’ at year three on any new lease allows flexibility, which means that, if for instance you win a big contract, or something changes, the business is able to relocate to a bigger site in the area without being tied in on the existing site for years to come.
4. Market performance versus inflation
It’s important to consider if you should choose a retail price index (RPI)-linked or open market rent review. An RPI-linked review will rise in line with how much the index has increased over that period. It’s a predictable choice, but negative inflation is rare, so it’s likely that you will see a noticeable increase of about 2-3% per year on review.
An open market review, on the other hand, is based on the valuation of the property at the date of your review, as if it is a new lease. The experience of one business that chose an open market over an RPI-linked review confirms this can make a difference to your bottom line – their annual rent increase was £10,000 lower as a result.
That’s because rents across the UK haven’t generally shown much increase in recent years. However, if you happen to be located near a new development – a shopping centre, for instance – it may be a different story.
5. Lack of schedule is a liability
When you move into a new property, you’ll also need to agree on who manages repairs during and at the end of the lease period. Is it you, or the landlord?
With ‘full repairing liability’, the tenant is responsible for handing the building back in good condition, having fully redecorated and refurbished, regardless of the condition in which they take it.
A schedule of condition is useful under these circumstances as it provides a record of the condition of the building at the start, limiting the tenant’s repairing liability at lease expiry. That could avoid a repair bill running to tens of thousands of pounds.
So, no matter what property, location or terms you are seeking, getting expert advice on commercial lease negotiation or renewal can ensure that you have the right clauses in your lease to support your business as it grows. Ask the property team to check for you to see if you could get a better deal.