By Stephen Hedley
Look before you lease
9 August 2010
The costs of securing the right or wrong lease on a premises can help make or break a business, and law firms are no exception. So what are the key points to remember when signing on the dotted line?
Recent events at Halliwells have shaken the legal community and have served as a reminder to law firms that they are not immune to the downturn and the economic pressures that other business sectors are facing.
While the full extent of Halliwells’ difficulties cannot be attributed exclusively to property costs, it remains a fact
that property costs are one of the most significant expenses a business will face.
The following points act as a reminder of the areas to consider when taking a new lease that will help ensure a flexible and cost-effective deal is reached with the landlord - key to keeping business costs under control:
Does the space meet the current and future requirements of the business and is it flexible enough to change with advances in technology and working methods? Are the costs of fitting out realistic? Taking too much space or badly configured or located space will be costly in the long run. The lease should contain as few restrictions on alterations as possible. Having to obtain the landlord’s consent each time alterations are made will prove costly and time-consuming.
- Length of lease
Balancing a landlord’s desire for a long lease term with the tenant’s need for a shorter, more flexible term is a challenge. Tenants want continuity for their business as well as the ability to change and minimise their stamp duty land tax (SDLT) liability - a short lease term with an option to renew reduces SDLT. A longer term with break options may be the answer. This is likely to be preferable for a landlord to a shorter term and a landlord is likely to be more willing to make concessions when a longer term is agreed.
- Break options
The dates on which the tenant can end the lease can be fixed or break options can be activated at any time by the tenant during the lease term on notice. In either case these must be unconditional. A condition, for example, requiring all the obligations under the lease to be performed before a break can be exercised effectively renders the break option inoperable. Break option conditions will be interpreted strictly against the person seeking to exercise it and time will be of the essence in respect of any time limits in the break clause.
The tenant should also have the right to assign and/or sublet at any time subject to as few conditions as possible. The ability to sublet is crucial where a lease is to be entered into on the basis that, over time, the tenant would expand into the premises.
- Rent review
Landlords are still looking for the traditional upwards-only open market rent review at five-yearly intervals. Tenants should be innovative in their thinking, seeking alternatives such as fixed rental uplifts, upwards/downwards rent reviews with a cap and collar or all-inclusive rents. An all-inclusive rent helps fix the lease costs, avoiding the possibility of escalating service charge costs and insurance rent.
Professional advice needs to be sought to ensure that a rent-free period and/or payment to the tenant of a capital contribution is negotiated in line with the market norm. Vacancy rates are increasing, rents are falling and tenants’ demand for space is diminishing. Landlords are keen to protect cashflow, avoid empty rates and attract tenants with offers of improved terms for new tenants.
- Service charges
Service charge costs must be given more consideration as the focus all too often is on the annual rent. Service charge caps should be negotiated. These caps can be fixed or subject to increases in line with the Retail Price Index.
Another ’hidden cost’ is the upkeep and maintenance of the premises, as landlords will insist on a full repairing obligation. In order to limit ongoing maintenance costs and the dilapidations liability at the end of the term it is important to keep the premises maintained throughout the term, thereby spreading the cost. The lease should be clear as to who is responsible for repairs and where possible limit the repairing obligation by reference to a schedule of condition. The cost of dilapidations on existing space also needs to be factored in.
All businesses should remember that rushing into a new lease can have disastrous consequences. Taking professional advice and devoting time to negotiating a new lease can help mitigate the risks involved.
Stephen Hedley is a partner at Cripps Harries Hall
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