Is your lease up for renewal?

Your lease expires later this year.  You know or suspect that you are paying too much rent or that there are better deals to be had elsewhere.  Either you want to stay put, as location is key to your success, or relocating would be a hassle and expense which you could simply do without.

Your chances of negotiating a lower rent and/or more favourable lease terms will be greatly enhanced if you go to your landlord well informed and armed with a list of alternative premises and comparables.  You could seek advice from a local, experienced surveyor and/or if you have good relationships with nearby occupiers, see if they will discuss their lease terms with you.  The more empty property your landlord has, the better still the deal you could strike.  From April, landlords will pay business rates on all vacant properties with a rateable value of more than £2,600, so voids will be even more costly for landlords.

Whilst the initial yearly rent and length of term are likely to be the first points which you and the landlord focus on, your liability can be reduced in many other ways.

Term 

If location and goodwill matter, a longer lease will be better, preferably with the protection of the security of tenure provisions of the Landlord and Tenant Act 1954.  If your existing lease is not protected, you may wish to request that your new lease is, giving a legal entitlement to a new lease after that one expires (subject to certain statutory exceptions).  Note that stamp duty land tax (SDLT) varies according to the length of term and amount of yearly rent.  If you agree a ten year lease with a break at year three, you will be liable for SDLT on the full ten year term.  To reduce SDLT, consider a shorter lease term, with an option to renew.

Break clauses  

A tenant right to break is an easier way out of the lease than assigning or underletting and may also be crucial after a rent review, if the rent increases above a level you can afford.  Resist all pre-conditions to exercising a break right, other than the payment of all yearly rent and the giving of vacant possession.  Courts continue to interpret even minor breaches of break conditions very strictly.  Ideally, you will have the right to break on a rolling basis, failing which try to agree regular break dates.  It is important to know that unless your lease contains an express right to repayment of any rents and other sums which you have paid in advance for the period after the break date, the landlord is not obliged to pay them back. 

Payment of rent monthly

To assist your cash flow, ask to pay rent monthly. Landlords have become more amenable to this, particularly if coupled with an agreement to pay electronically, rather than by cheque.

An initial rent-free period, reduced rent period or one-off inducement payment

It may be easier to sell this idea to the landlord if, for example, you are planning improvements to the premises or it may simply agree to avoid an empty property.  You could also consider seeking a further rent-free as a reward for not exercising a break right further down the lease term. 

Rent review

Landlords still favour the upwards only review but there is no harm asking your landlord to consider an upwards/downwards review to open market rent, especially if it can never fall below the initial annual rent.   Failing which, think about fixed increases, increases linked to a specified index (eg. the Retail Prices Index) or turnover-based increases.   Where an upwards only rent review is agreed, ensure that the value of your business is disregarded at review, also improvements which you have carried out during the term of the previous lease (as well as those during the new lease term). 

Assigning, underletting and sharing occupation

The ability to deal with the premises should be subject to as few conditions as possible.  Authorised guarantee agreements should only be required where reasonable, preferably not at all where your assignee is of greater financial strength than you.  On underlettings, agree only that the underlease rent should not be less than market rent.  References to the higher of market rent and the rent passing under your lease could prevent an underletting in a falling market.   Ask to group share without consent.

Repair and reinstatement

Your repair obligations (including any contribution towards repair costs via a service charge - see below) should always be appropriate to the length of your term and the condition of the premises at the start of the lease.  The only way to fully protect yourself is to agree to keep the premises in no worse condition than at the beginning of the lease, documented by way of a schedule of condition. If the landlord will not agree to this, you must carefully review the repair wording in the lease as this is a contentious area.  There are certain obvious precautions - like avoiding references to rebuilding and renewing, which clearly go beyond repair.  Reinstatement of alterations carried out during the term should only be required by the landlord where reasonable and the landlord should notify you of its requirements for reinstatement well before the lease expires. 

Service charge and insurance contributions

You will know previous levels of service charge paid by you but you must check whether any major new works are planned or some costly item of expenditure is imminent.  Where possible, negotiate a cap to limit liability.  Your service charge contribution may be calculated as a fixed percentage of total expenditure, which provides certainty and simplicity but may leave you exposed to items you do not benefit from - eg. a lift the other side of the building - or footing the bill for unlet space.  References to fair/reasonable/proper proportions offer more flexibility but more scope for dispute.  However service charge is arrived at (other methods include floor area and rateable value calculations), it is increasingly common and sensible for a tenant to identify items it won't contribute towards the cost of - eg. future redevelopment and the replacement and rebuilding of items which are not beyond economic repair, as well as the costs referred to above.   As for insurance contributions, these may also be considerable.  Check that there is a rent suspension if the premises are damaged by an insured risk (and preferably an uninsured one too).   Also that if the landlord insures against loss of annual rent and service charge, the rent suspension covers both.  Ensure also that you are able to terminate the lease if the premises have not been reinstated by the time the rent cesser period expires.

Alterations and signage 

Applications for consent to alter or erect signage can be costly and time-consuming.   Ideally, your landlord will agree that internal, non-structural alterations can be carried out without its consent, unless they might affect services or systems in the remainder of the building.  If relevant, you should also ask that no consent be required for professionally prepared trade signage which doesn't obscure more than X% of the windows of the premises. As a fall-back, consent in either case should not be unreasonably withheld or delayed.  Most landlords will agree to tenants erecting, moving and removing internal, non-structural partitioning without consent. 

To summarise

The more of the above points you can agree with the landlord, the easier it will be to run your business with minimum interruption, to hand back or deal with your lease should your circumstances change and to avoid nasty financial shocks over and above the level of agreed yearly rent.   Agree them as far in advance as possible, particularly if you do not have a protected lease as your entitlement to remain at the premises ends immediately the lease does.  Make a written record of all agreed points so as to minimise arguments, delays and additional costs when the lease negotiations commence.