Six Common Lease Negotiation Oversights
With signs in many sectors of a return to normality, BRM’s Real Estate Team has been dealing with a large number of new leases for landlords and tenants alike.
To avoid being stuck with unfavourable terms, tenants should take appropriate advice at an early opportunity as commercial leases can contain a number of often overlooked and expensive pitfalls.
Below are six of the most common oversights made by tenants during lease negotiations.
1. Repairs
Tenants often sign up to “full repairing” leases without considering the consequences.
These obligations often require the tenant to keep and return a property in “good repair”. This could require improvement to the standard of premises taken on at the start of the lease. This can also be costly and open the tenant up to an expensive dilapidations claim from the landlord at the end of the lease term.
The bigger the premises the larger this sum is likely to be.
A repair obligation linked to a schedule of condition prepared by a surveyor can provide greater clarity and comfort and should be requested at an early stage in any negotiations
2. VAT
Many landlords charge VAT on rent as they have “opted to tax” their premises.
This additional 20% can place a strain on budgets and have an impact on Stamp Duty Land Tax (SDLT) liability.
3. Stamp Duty Land Tax
Tenants often do not realise that SDLT applies to leaseholds and can be left needing to find additional funds in order to file a return with HMRC within 14 days of lease commencement.
Whether this is due depends on the length of term and amount of rent due and should be checked at an early stage.
4. Insurance and Service Charge
Tenants should not think a headline rental figure is the extent of their payment obligations.
Buildings insurance is usually put in place by the landlord and recharged as an additional rent. A service charges are also likely to apply to premises that form part of wider buildings or estates with common facilities that have to be maintained or provided by the Landlord.
Again this can impact on budgets.
5. Early Termination
It may be uncertain whether the premises will be needed for the whole of the term of the lease. In this situation, a tenant would be well advised to agree a break option with the landlord which will allow for early termination. The tenant should also ensure this is not made subject to conditions that they are unable to satisfy.
Without it the tenant will be tied to the lease liabilities for the full length of the lease. Break clauses can be notoriously strict so careful drafting and understanding is required.
6. Continuing Liability
Most commercial leases will allow for assignment to third parties. However, it is highly likely the tenant will be obliged to guarantee the performance of anyone is transfers its lease to.
This can result in them being required to take on a new lease of premises long after they have ceased to occupy them and also for guarantors who have supported the original lease.
