Last but not lease: Adam Bernstein investigates how a practice can obtain a good deal on a commercial lease.
A lease is required when any commercial building is to be occupied for six months or more for business purposes. As a tenant, the practice owner will want to get a good deal financially when negotiating, particularly in the current difficult trading times where high rents are forcing many retailers off the High Street.
Tenants will clearly be looking for a good deal in terms of the quality of property on offer--for example, does it have air-conditioning and car parking? And what is included in the service charge? These are all factors that need to be taken into consideration in addition to the rental cost.
Negotiating a lease
According to David Baybut, a partner and head of commercial property at Stephensons Solicitors LLP, leases are usually in writing and can run to 60 or more pages. "They tend to include a raft of standard details, including the rent to be paid, space occupied, how long the lease is to last, the tenant's responsibilities and rights as well as the landlord's," he explained.
Commercial leases can be complex and often include additional clauses, or 'mini agreements', which could have a considerable impact. Mr Baybut added that it is important to take good advice from a trusted professional at this stage. They can negotiate with the agent or property owner and secure the best possible outcome.
Alasdair Fleming, a partner in the property department at Brodies LLP, a firm which works with the AOP, says that many optical businesses are run from premises which form part of larger developments. "In a standalone unit, the landlord is likely to pass the obligation to maintain and insure the whole building to the tenant," said Mr Fleming. "When taking premises in a shopping centre, there are common parts that need to be maintained--these are normally captured within a service charge which is normally calculated by dividing the cost of maintenance and repair of the common areas such as roofs, walkways, car parking and services."
Mr Baybut also warned about service charges, saying: "They are a major expense, therefore tenants should make sure they have a clear understanding of what is included so that no nasty surprises rear their head later on."
Rental voids also need watching, said Mr Fleming: "When units are not let and a contribution is not being made by a tenant in a unit, tenants should be careful not to allow the landlord to recover any additional proportionate share from them."
Service charges can cause problems because tenants often have a different understanding of what is covered under the charge, compared to what the landlord is prepared to offer.
According to Mr Baybut, it is also worth ensuring that the service charge is capped, particularly when the lease is only short-term and the building may be in need of imminent substantial repair. Mr Fleming agreed, adding: "An uncapped liability can affect the entire viability of the tenant's business."
Practices should look at the insurance costs for the building, finding out who pays for the insurance before committing to the lease. It could be fatal for the practice to assume that the landlord has provided insurance and that the cover is sufficient.
Mr Fleming said: "It is normal with a full repairing and insuring lease for the landlord to insure the premises, with the tenant meeting the cost of the premiums." However, he added that tenants must check the definition of the uninsured risks and where the responsibility lies to meet the cost of any damage which does not fall within the insured risks. "These may include anything for which the landlord is unable to obtain insurance and landlords will endeavour to carve out of the repairs obligation any uninsured risks, leaving the tenant with the responsibility to meet these," explained Mr Fleming.
Repairs can also mean an additional cost, as Mr Baybut explained: "It is a wise tenant who checks who is responsible for the cost of repairs, especially if the building is old and in obvious need of updating." He also suggested finding out from the landlord what state a building must be in at the end of the lease so that money can be put aside for this.
Most landlords ask that their tenant keep their premises in full repair. This means that if at the outset the premises are in disrepair, through no fault of the tenant, it is still the tenant's responsibility to 'make good' the premises.
It is also important to be aware of the differences between the English and Scottish legal systems. "In England there are statutory controls on a landlord's ability to enforce repairing covenants which do not apply in Scotland," said Mr Fleming, adding: "Nor are there any statutory limits on the amount that can be claimed by the landlord as damages for dilapidations.
"The extent of the repairs required by the tenant to put the premises 'in good and tenantable condition' at termination of the lease may involve returning the premises in a far better condition than when they were first let," he explained.
Another issue to consider is the obligation for repairs on shared premises. While shopping centres cover this via a service charge, Mr Fleming said: "In a traditional High Street store, a tenant should be mindful of their obligation to pay a share of the repair and maintenance of common parts and the condition of those common parts when the lease is entered into. A survey is crucial."
Mr Baybut added: "Landlords may issue schedules of dilapidation at any time, focusing on the repairs needed to reinstate the property and correct any damage done throughout the course of the tenancy." He said that the most contentious time for schedules to be issued is at the end of a tenancy when the tenant has vacated the building. The landlord will use its own surveyor to estimate the costs; tenants soon realise that they could have made repairs themselves for less, but once the agreement has ended, it is too late.
With some commercial leases at the 10or 20-year mark, such long lets could carry too much risk for the smaller business. The experts caution against signing a lease longer than three to five years and to weigh up the options carefully.
Break clauses allow both the tenant and landlord to end the lease before the full term, and crucially, they can protect the business owner if the business falls into difficulty and needs to cease trading. Mr Baybut said: "It's a good idea to have a break clause included in the lease as it will save a tenant from being personally liable for the rest of the lease costs. If the break clause is timed to coincide with a rent review, it could give the tenant an option to vacate the premises if the landlord makes unreasonable increases to the rent."
The key," explained Mr Fleming, "is to understand the notice provisions relating to the break clauses and to comply with them. Failure to do so, and in accordance with the notice provisions in the lease, may lead to the option to break being lost."
"But," adds Mr Fleming, "if the landlord considers the tenant has not performed his repair and decoration obligations, the tenant is still entitled to rely upon his break clause to end the lease, but the landlord will be entitled to pursue him separately for the financial losses of the tenant's failure to meet their obligations or to comply with other conditions and requirements."
Assignment and sub-letting
Generally, landlords will agree to tenants reassigning their leases if the incoming tenant has to follow the same obligations. Mr Fleming explained that leases usually require that consent to an assignment is unreasonably withheld, "coupled in most cases with a requirement that the assignee be respectable and responsible and capable of performing the tenant's obligations under the lease."
However, while sub-letting of the whole of the premises is normally something that a landlord will accept, a landlord will normally strongly resist the sub-letting of part. "This," said Mr Fleming, "is something to be carefully considered by optometrists who may wish to share their premises with another service provider and this is something to be considered when entering a sub-lease."
In practical terms, Mr Fleming pointed out that tenants should be aware that sub-letting the whole premises with the landlord's consent does not relieve the tenant of liability in the event of a failure to meet the leasehold obligations by the sub-tenant. Mr Baybut expands on this: "Care is needed when considering this option as leases can ask for a guarantee that will be used if this option is chosen."
Terminating a lease
Contrasting positions north and south of the border, Mr Fleming says that a lease in Scotland will only end on the termination date if at least 40 days written notice has been given to the landlord. "If that has not happened, the lease will renew on the same terms for a period of one year in terms of the common law principle of tacit relocation."
By comparison, the position in England is governed by the Landlord & Tenant Act 1954 with prescribed processes and timings for both sides to serve notices to end the tenancy.
Mr Baybut said that tenants need to be aware of the effect of their landlord wanting to exclude a lease from the Landlord and Tenant Act 1954.
Some landlords may want automatic possession of the commercial property, without fear of tenants claiming extended possession and occupation. If a landlord knows at the outset that they may want to occupy, redevelop or change the use of the premises in the future--acts that they cannot do with a tenant in possession--then they will want to see that there is no Security of Tenure granted to its tenant, and that the protection of the Landlord & Tenant Act 1954 is excluded.
On the High Street
David Samuel is managing director and co-owner of Eyesite, a four-location independent with a strong online presence. Having opened his first practice in Reading, in 1984, he has almost 30 years of experience in dealing with property and leases.
Although Mr Samuel has always used a property agent to negotiate leases, he consults with a good lawyer and surveyor to handle any dilapidation claims. "We try to have a relationship with the owner--the more human we are with them, the better the relationship is in case of problems later."
Mr Samuel cites his Brighton practice as an example: "The owner is an older lady, we've always given her good eye care in our practice and she can see that we're a good tenant."
Mr Samuel's advice is: "If you're going to be late in paying rent, for example, or you may do something that may upset the owner, speak to them first rather than wait and take the risk [of creating a situation]."
Practices in a dispute over a property should speak to a good lawyer and surveyor, he advises.
Recalling the relocation of his one of his branches, he said: "The agent was a nightmare ... [and] made all sorts of spurious dilapidations claims." The claim for more than 90,000 [pounds sterling]--was more than four times what was paid in the end and took Eyesite more than 18 months to settle. The claim was fought off by the lawyer and surveyor, but Eyesite had to call the agent's bluff by saying 'take us to court'.
Mr Samuel maintains that one thing is for certain, saying: "If you believe that you're right, stand your ground and don't be bullied."
For AOP members seeking more information, contact Alasdair Fleming, of Brodies LLP, email@example.com
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|Date:||Nov 1, 2013|
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