June 15, 2011

‘Need new business premises? – What are your options?’

Licence - This is usually a short-term arrangement. Your landlord can enter the premises at will, and require you to move out at short notice.

Lease - A lease is longer-term arrangement. Aside from access for repairs, ordinarily you will have exclusive use of the premises, and you have the right to remain for the duration of the lease.

What will I have to pay?
Once you are in occupation and have paid any upfront costs such as agent’s and solicitor’s fees, you will usually have to pay the following:

Rent - This can be payable monthly or quarterly, and the amount will be set out in your lease. You should also be aware that many leases contain provisions for the rent to be reviewed at certain times, and this may mean that the rent increases.

Service charges - Usually, the landlord is responsible for maintaining the building and insuring it, and will pass a share of this cost on to you by way of service charges. Often, the charge is estimated, and you will have to pay in advance. At the end of the year, if the actual cost is more, you may have to top up the payment; if it is less, the difference between the two is usually carried over to reduce your payment for the following year. You should make sure that you see evidence of previous year’s charges.

I need to move. What can I do?
When you enter into a lease, you are agreeing to occupy and pay rent for a fixed period. Leases can contain options for you leave early, rent the premises to someone else or pass the lease on to another tenant.

Leaving early - Some leases contain what is known as a break clause allowing the tenant to give notice at certain times. If you wish to take advantage of such a clause, you must be extremely careful. You must give notice at exactly the right time, and you must make sure that all rent and other charges owing are paid. If you do not, the break clause will fail, and you will have to stay and continue to pay rent and service charges.

Renting to someone else - This is known as sub-letting, and although someone else will be paying rent, you remain responsible to the landlord for all sums owing; if your sub-tenant does not pay, you will have to. You must get the landlord’s approval in writing to sub-let, and often, the landlord can refuse if they do not think the new tenant is suitable.

Passing the lease on - This is known as assigning the lease, and although the lease will be transferred into someone else’s name, the landlord will usually require you to guarantee the rent and other charges. As before, you will have to get approval in writing from the landlord.

With all of the above options, the landlord can usually require you to pay his professional fees; these normally include surveyor’s and solicitor’s fees.

My lease is nearly up. Can I stay on?
Under the Landlord and Tenant Act 1954, tenants have the right to a new lease except under certain circumstances, for instance the landlord may be intending to redevelop the site.

You do need to be careful, however, because it is possible to sign away your rights when you enter the lease. This is known as ‘contracting out of the Act’, and you will be giving up any right to remain if you do so.

My lease is up and I am leaving. Are there any additional costs?
This is another area where you need to be extremely careful. Leases can contain provisions that will require you to put the premises back into the condition they were in when you occupied. This can mean removing anything you have done and repairing and redecorating the premises, and can be a substantial amount.

The term used for this is dilapidations, and if the lease has such provisions, you should make sure that there is evidence of the condition of the premises attached to the lease before you sign it.

There is a problem with the building. What can I do?
In return for you paying the rent and service charges, your landlord is agreeing to look after the building. This is, however, an area where tenants should be careful, as most leases specifically provide that tenants cannot withhold rent.

What should I do next?
Once you have identified suitable premises, you should seek legal advice from an experienced property solicitor. As you can see from the very short summaries above, there are costs and liabilities that may not be obvious, and these can trap the unwary. You should not sign anything without taking advice, as you could end up having to pay far more than you thought, both during the term of the lease, and when it ends. For a confidential chat, without obligation, please give me a call.

This article appears in Royds "London Business Adviser" newsletter.

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