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In the following article, our commercial property solicitors have identified some of the challenges and pitfalls associated with a commercial property lease and prepared advice for local business owners. This will help them to be more aware of the pitfalls and make the right decisions when it comes to identifying the perfect premises for their businesses.
Landlords have been experiencing growth in rental incomes in Northern Ireland since early 2015 as the availability of commercial property space has declined as demand remains high. In recent months it has been reported that commercial landlords in Belfast are set to increase rental costs by up to 25%. At the upper end of the scale, rental costs have soared to £21.50 per square foot in the capital. Whilst this is good news for property owners, it is less pleasing to existing and new business owners who need a commercial property lease for their businesses.
Restrictive covenants place restriction on new tenants such as how the property can be used. A commercial property lease will commonly stipulate a specific type of use for a property, although some may allow for a change of use with the landlord’s consent. If you are reviewing a potential lease for your business it is advisable to check if the permitted use detailed by the landlord matches your intended use, and that the use stated is also lawful. A commercial lawyer can act on your behalf to check that that the permitted use stated by the landlord corresponds with the lawful use of the property, as detailed in legal documents such as the deeds to the property, planning permission documents and any licencing documents pertaining to the property.
The repair covenant is also particularly important to check to ensure that you are not obliged to maintain the property to a better standard than that at the commencement of the term.
It is important to ensure that any alterations that you intend to carry out to the property are agreed with the Landlord in advance to ensure there is no dispute thereafter and what if anything you will be obliged or entitled to remove at the end of the term.
Some properties are let on a 10 or 15 year commercial property lease despite market conditions indicating that a shorter term may be available. This is a long time if you are a new or relatively new business therefore making such a commitment may be difficult, unless break options exist. Avoid getting tied into a long-term lease unless you have checked the ‘get out clauses’ and have fully weighed up the impact and costs to your business of exiting the lease early.
You should also have the ability to assign or sublet the lease to a third party within reasonable conditions.
A commercial property lease will include a rent review provision on a five yearly basis to negotiate rents upwardly only to open market rent levels. It is essential that the definition of Open Market Rent is reviewed to ensure that it is fair on the Tenant and that they will not be unduly penalised in paying a rent higher than necessary. Furthermore the increased rent should not include any element for value which the Tenant has brought to the Property.
Service Charge and Insurance Rent provisions must be carefully checked to ensure that you are not obliged to pay for expenses that should fairly fall to the Landlord and that your liability is to a fair proportion of the overall building.
A tenant typically has a statutory right to renew a tenancy under a commercial property lease as detailed in the Business Tenancies (Northern Ireland) Order 1996, however a landlord may have the right to oppose your request to renew a lease in certain circumstances, for example if the tenant has allowed the building to fall into disrepair, has defaulted on their rent payments or has failed to meet other conditions detailed within the contract. A landlord can also oppose renewal if they can demonstrate that they will re-develop the property or occupy it themselves. Ask your solicitor to review the contract and renewal clauses, and also check with your landlord what his/her long-term plans are for the premises prior to signing a lease agreement.
Over the last 10 years the recession has impacted on business owners and landlords alike. Cases exist where a landlord has failed to meet their obligations, or has even become insolvent. To avoid loss of your deposit, ensure that your solicitor has carefully reviewed the wording of the commercial property lease and deposit deed to reflect your interests. Deposit funds should be detailed as being separate to the landlord’s assets, and therefore fall outside of the landlord’s estate and the grasp of liquidators, if appointed.
If the Landlord is not maintaining the Building to the appropriate standard or there are issues concerning access, services or the Tenants ability to trade the Tenant need protection by way of suspension of rent provision so that they are not paying full market rent when their day to day business is interrupted.
Experienced commercial solicitors can identify the ‘worse case’ scenarios that business owners may fall foul to upon signing a commercial property lease. In such cases, they will be able to represent the business owner’s best interests in lease negotiations and mitigate, as far as possible, against any risk factors by sourcing and reviewing all documentation and recommending changes to the wording prior to an agreement being signed.
If you are a business owner who is sourcing commercial property to rent (or a landlord with property to rent), contact our commercial property solicitors at law@lukecurran.co.uk or 02830267134 for advice on leasing agreements.
