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Making an offer for leasehold premises

Updated on June 14, 2008

Introduction

You have decided to set up or expand your own business and are now thinking of taking a lease of some business premises.

Before you make an offer, read this.

The grant of a new lease

You will either be in a position where you take the grant of a new lease from the landlord, where you take a sublease from the existing tenant or where you take over an existing lease from the current tenant (called an assignment). This article deals only with the first situation, namely the grant of a new lease by the landlord.

Making a offer

Look at as many properties as you can before you make an offer to get a feel for the price, location and space. When you have found one that suits your requirements you will need to make an offer to the estate agent. It is best to do this in writing and mark your letter "subject to contract".

You should set out:

1. Tenant's Details

Give the name of the proposed tenant (making sure you give the correct legal entity ie. sole trader name, limited company name, names of all partners) and the address; if it is a company then also give the company number and registered office address.

Also provide any trading name if this is different.

2. Your solicitors' details

3. Your referees' details

You will need to provide names, addresses and telephone numbers - you will normally be expected to offer references from any existing landlord, your solicitors, your accountants, a main supplier and your bank. If it is a new business then you may have to obtain personal and bank references for each individual and if a new company then for each personal guarantor as the company will not have a history.

4. The rent

Make an offer for the rent you are willing to pay. This is often negotiable so do consider making a lower offer. Be aware that rents can be subject to VAT depending on whether the landlord has opted to tax or not and although this makes no difference to the amount you pay because you can reclaim it, you will have to have enough cash-flow to pay the VAT before you can reclaim it but your accountant can advise you further on this aspect.

5. The term of lease

Again this is usually negotiable. Depending in the locality in which you operate, leases tend to be in multiples of 3 or 5 years. Terms of 3, 5, 6, 10 and 15 years are quite common. Generally the smaller and cheaper the shop the more likely that the landlord will agree a shorter lease term and the same is true of underperforming areas where there is a high turnover of tenants(an area to avoid!).

Landlords tend to like longer terms rather than shorter but if you are worried about taking on a long lease, consider proposing a tenant's only break option say at the end of year 3 and perhaps also later on in the term. Work out how long you can hold out for financially if things go horribly wrong and suggest a break at that point.

Unfortunately many shops seem to fail so it is important that you work out your exit strategy in advance. It is so much better to have a clean break from the lease after which your liability will cease than to try to find someone to take an assignment or sublease from you as you will remain liable for the performance of any assignee's obligations and for the lease if you have a subtenant.

6. Alienation

Stipulate that the lease should be assignable and that you have the right to sublet at least as a whole and if the premises lend themselves to being subdivided, then also in part.

7. User and alterations

Specify the use to which you wish to put the premises and any major alterations you wish to make as you will need permission for these in due course anyway

8. Timescale

Set out your proposed timescale for the transaction - although this type of conveyancing can be done in as little as two weeks, this is quite rare and it could take up to four months or even longer if planning permission is required to change the use.

9. Rent Free Period

Try to negotiate a rent free period. Landlords usually agree a certain time period during which you don't have to pay rent while you fit out the premises. This can range from 1 month to 1 year depending on the length of the lease and the size of the premises and amount of rent payable. Your solicitor should be able to advise you what is standard in your area.

10. Security of Tenure

You should be aware of the Landlord & Tenant Act 1954 which gives tenants the right in certain circumstances to renew their lease at the end of the term and provides for the tenant to be compensated if the landlord opposes a renewal on certain grounds eg. that he wishes to redevelop the property. This is obviously a useful right to have if business is going well so you should resist any attempt of landlords to try to make you "contract out". The terminology is that you want the lease to be "inside the Act".

11. The rent review pattern.

Most rents are based on the market rent for a particular property and rent reviews are usually 5 yearly for leases which are in multiples of 5 years and 3 yearly for lease which are in multiples of 3 years. You should resist any attempt of the landlord to impose a more frequent review pattern.

12. Guarantees/deposits

Be aware that unless you can demonstrate profitable accounts over a period of at least 3 years , you will be asked for either a rent deposit or a personal guarantee. A rent deposit is preferable because your personal liability, if the tenant is a company, is limited to the amount of the rent deposit and compliance with the obligations of the rent deposit deed rather than a personal guarantee which is much further reaching. It does mean that your money is tied up in the Landlord' bank account for a while but you should specify that interest will belong to you, is at the best rate obtainable and that the money is returned to you when you can demonstrate a certain level of profitability.

13. Repairs

Specify any works you expect the landlord to do before you take the lease. It is well worth having a survey carried out to ascertain any repairs which need doing so you can either ask the landlord to do these before you take the lease or renegotiate the rent.

Specify any special provisions relating to your repairing obligations: for example, if it is a new build, you will not want liability for inherent defects (as the landlord can usually claim these on warranties), if the property is in bad condition and you will spend a lot of money on renovating it make sure that your works are disregarded for rent review purposes, if the property is in poor condition, that you will not be obliged to put the property into a better state than it is at the time of lease (usually evidenced by a photographic schedule of condition) etc.

14. Costs

Specify that each party will pay its own costs in relation to the transaction. Landlords often try it on and get you to pay their legal costs - this was common in the late 80's but is unusual now.

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