Thinking of renting a new office? Before you sign on the dotted line, read on. Solicitor Mary Cutts of Lemon & Co advises you read the small print to make sure you know what your lease is letting you in for…
How long should I rent it for?
That depends on how confident you feel about the future success of your business. If your business is fairly new, try to negotiate the inclusion of a break clause - that is the chance for you to end the lease after a certain period. Check the small print, though. Tenants often have to have to comply with all lease obligations before they can exercise the right to walk away early. This means your landlord could refuse to let you end the lease simply for failing to comply with an obligation to redecorate or carry out minor repairs to the property.
When the lease does come to an end, you'll almost certainly have an automatic right to renew it, unless your landlord needs to occupy the premises for his own business purposes or has definite plans to demolish or redevelop the property.
By the way, the longer the lease, the more likely you are to be liable to pay Stamp Duty Land Tax. For example, the duty payable on a 10 year lease with an annual rent of £25,000 (assuming VAT is not charged on that rent) is £579. If the lease period were 7 years the duty payable would be just £28.
What exactly does my rent include?
As well as rent, you will often be expected to make a number of other payments. These include VAT on rent, insurance premiums, and, if you are leasing part of a building, a service charge towards the landlord's overall costs of maintaining and repairing the whole building and its services. Bear in mind that if you pay any sums due to your landlord late, interest may also be payable.
Check the lease carefully to see whether any of these payments payable as additional rent. If they are and you fail to pay them, your lease could be brought to an end. If you have a dispute with your landlord over rent or any other charges payable as additional rent, think carefully before withholding future payments. Your lease will almost certainly prevent you from deducting disputed sums from rent or service charge payments. Your landlord may be entitled to charge you interest on all outstanding payments due under the lease. He could also send in bailiffs to recover any sums due to him and to charge you for his costs in doing this.
Who pays for repairs and services?
This is an important one. Your lease will state who is responsible for carrying out repairs and maintenance to the property. If you are taking on a lease of a whole building you will probably be entering into a full repairing lease, which means you will be responsible for looking after the whole building including such major items as the roof walls and foundations. If the building is in a poor state of repair when the lease starts you may be liable to bring it up to the condition required by the lease, unless you can negotiate a better arrangement with your landlord. Even if the landlord or his surveyor do not inspect the building during the lease period, remember that you will have to bring the building up to standard when it ends or pay the landlord compensation for the costs of necessary repairs and decoration.
Whether it is a full repairing lease or not, it is sensible to get a survey done on the property in order to assess its condition and your potential liability for repairs. The longer the lease period the more important this becomes. You'd do it if you were buying a house, after all. In any case, it's worth negotiating the repairing obligations of the lease in order to limit your liability as far as you can, so you won't have to put the property into any better state of repair and condition than it is in when the lease starts. A good way of establishing this is to attach a written or photographic record of the condition of the property to the lease at the outset.
Service charges
If your leased property forms part of a larger building or complex all of which is owned by the same landlord, you're likely to have to pay service charges.
Before you take on a lease, ask your landlord to provide details of any service charges and to itemise what they include. Ask whether he anticipates any major expenditure in the foreseeable future, such as resurfacing an estate road or replacing a lift, and whether a sinking fund has been set up to pay for theses costs.
Check the lease to see what provisions there are for resolving disputes over charges. If there are no provisions for arbitration, you may have to go to court to seek a solution, which is time consuming and expensive.
Mary Cutts
Solicitor
Lemon & Co Solicitors
This article gives a general view and cannot be relied upon in any particular case. The need for specific legal advice must always be considered. For further information, contact Mary Cutts or another member of the commercial property department at Lemon & Co on 01793 496341 or alternatively, please visit our website at www.lemon-co.co.uk for articles on other legal issues.
Case history 1
Mrs and Mrs Ellis, a couple in their early 30s, took on a 25-year lease of a small country hotel which was a listed building. The business was extremely successful for the first three years, but suffered badly as a result of the foot and mouth crisis. They decided to sell the business, assign the lease and take full time jobs elsewhere instead. When they purchased the property they had decided against having a building survey done because they felt they could not afford it at the time.
They quickly found a buyer who did have a survey carried out and which, to the Ellis' horror, revealed extensive problems with the property, some of which had arisen before they had moved in. Repairs would cost around £250,000. Needless to say, their buyer immediately withdrew from the transaction.
When Mr and Mrs Ellis looked at the lease again, they discovered that it was a full repairing lease and this meant that they would not be able to sell their business until they had carried out all of the repairs. To add to their worries, they realised that they would face a dilapidations claim from the landlord if they failed to do so.
Moral: Before you take on a lease, especially of an older or listed property, check the lease for your responsibilities for repairing it and have a survey carried out.
Case history 2
A small charity took on a lease of an office in a large building for 3 years. After 18 months the landlord replaced the security system in the building at a total cost of £72,000. The landlord had not set up a sinking fund to assist the financing of the works and therefore needed to recover the costs through the service charge provisions of all the leases in the building. The service charge was recoverable as additional rent under the terms of each lease. The charity suddenly found itself with a one-off additional increase in service charge of £6,000 in one year. There was no provision for dispute resolution in the lease so the charity's director, who had not been consulted about the increased charge, refused to include the extra payment in response to the next quarterly rent demand from the landlord. The landlord sent the bailiffs in. As the charity had technically defaulted on payment of rent the bailiffs seized the charity's computers. The charity's only option was to take the landlord to court to resolve the dispute which has turned out to be a very expensive option and a further drain on the charity's already stretched resources.
Moral: If you are in dispute with the landlord over the service charge, you can't simply withhold payment if it is recoverable as rent under the lease as the landlord is entitled to take steps to recover it from you. Make sure that your lease includes a provision for you to challenge the landlord's service charge expenditure if it is charged unreasonably. It is also worth asking your landlord if he anticipates any substantial expenditure over the term of the lease and whether he has established a sinking fund to pay for these costs.
* Names have been changed to protect confidentiality
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Tenants often have to have to comply with all lease obligations before they can exercise the right to walk away early. This means your landlord could refuse to let you end the lease simply for failing to comply with an obligation to redecorate or carry out minor repairs to the property....</p>