Negotiations between landlord and tenant when agreeing on a commercial lease will always be unique as no two landlords/tenants are the same. It is therefore important to understand the key points to negotiate in the commercial lease and how they pertain to you and your business.
The commercial property team at Howell Jones understand that agreeing heads of terms for a lease can be a complicated and often confusing process and therefore offer an individual service to ensure our clients are properly advised before any drafting of the lease takes place.
This article considers the rental elements in a commercial lease and the approach you might take in the negotiation, depending on whether you are landlord or tenant.
Understanding Commerical Leases
The initial rent under the lease is clearly important. This will be the starting point on which the parties can then agree on provisions for a rent review or for a ‘fixed stepped rent’. That means it is important to ensure the initial rent is set at the right level.
To achieve a fair rent between the parties, there are numerous factors to take into consideration. The tenant should check the rental values of other similar properties in the locality and compare these to the property it is attempting to lease.
From a landlord’s perspective, irrespective of the rent being paid in the locality, there may be an argument that the property is unique or that rental property may be scarce in that particular location. This tends to lead to a higher rent being demanded by the landlord.
The rent can also be fundamentally affected by the other terms of the lease. For instance, where the tenant is an established business with a notable trading history, it presents the landlord with confidence in the tenant and, as a result, the initial rent can remain close to the open market value. However, where the tenant is a start-up or does not have a solid trading history, the landlord might seek a premium from the tenant. If such a tenant is supported with legal advice, they may be able to mitigate increases in annual rent by offering a personal guarantee or removing/delaying the tenant’s break right. Offering these changes to the landlord affords the landlord increased stability and can therefore be leveraged by the tenant to control the requested rent.
Rent reviews
Both parties to the lease should check when rent reviews will take place and what triggers these. Does the landlord need to give notice of its intention to increase the rent, or does it happen automatically?
Tenants under higher value leases should also consider the impact of a rent review on their Stamp Duty Land Tax (SDLT) should this occur within the first 5 years of the completion of the lease as the rent review could trigger an increased SDLT liability several years into the lease term.
Both parties need to ensure that the rent review mechanism is clear, workable and what happens when they are unable to agree to the increased rent.
Commercial Property Lawyers: Howell Jones
If you are considering granting/taking a new commercial lease or are in the process of renewing your current lease, please contact Howell Jones on 0800 011 9813 to discuss how we can assist you.
