Negotiating a lease as landlord

There are a lot of issues you need to consider. You definitely need an experienced surveyor or estate agent to help you negotiate the right terms. It could save you a lot of money and trouble in the long run. We can recommend one if you need advice.

A lease can run to 50 pages or more. All leases contain mainly standardized provisions, but they can be worded so as to be ‘landlord friendly’ or ‘tenant friendly’, and our job would be to make sure it is ‘landlord friendly’.

This is what a lease will generally cover -

Premises. The premises will be precisely described, with a plan if necessary. Any rights the tenant will need over the rest of the building should be specified (and any rights you need over the premises you are letting for the benefit of your other tenants or neighbours).

Rent. The lease will say how much the annual rent is and when it’s paid (usually four times a year). You need to make sure that the lease provides for Value Added Tax if any to be paid in addition. (Even if no VAT is payable now, things can change.)

Rent deposit. You should try to get a rent deposit of at least 3 month’s rent (try for 6 months) as security for future rent payment and compliance by the tenant generally. Ideally you would want a personal guarantor if your tenant is a company, but it is increasingly difficult to get tenants to accept personal liability.

Rent review. If you are granting a lease for 10 years or more, you should have a rent review every 5 years. (For shorter leases, you may be able to negotiate a rent review after 3 years, or even an annual increase in line with the Retail Prices Index, although that would no be usual.)

Term. You need to decide on the length of the term. A long term gives you a ‘guaranteed’ investment return, which a rent review provision will keep up to date. A short term may be needed if you plan to redevelop the building, or if you foresee profitable changes in the area which would make re-letting attractive.

Break clause. Your tenant may seek to negotiate a ‘break clause’. This would allow the tenant to get out of the lease earlier than the end of the term. It can be worded to be for a particular date, such as the first anniversary of the term, so if the tenant doesn’t break on that date he has to stay in the lease till the end of the term. Or he may seek a “rolling break” which means he can break at any time by giving you notice. A break at a particular date only is usually best from a landlord’s point of view. You should require at least 6 months notice to give you time to arrange a re-letting.

Use. The lease will specify the use to which the premises can be put (the type of business the tenant can carry on). A limited use to a particular business gives you control, but a wider use to any business which doesn’t need planning permission for the change will be better for you at the rent review.

Who repairs. The lease will say what the tenant is responsible for repairing. It may say the tenant is responsible for maintaining structural parts or only internal parts of the premises. If you let a whole building for a long term, it would usually make sense to make the tenant agree to pay for and carry out all repairs. If you are letting for a short term or only part of a building, you should normally expect to maintain the structure, the exterior, the common parts and the services yourself and recover the cost from your tenants by way of a ‘service charge’. The tenants themselves would remain responsible for maintaining the non-structural interior of their premises.

Standard of tenant’s repairs. The lease can provide that the tenants must return the premises in the same state of repair, or better, at the end of the term. It’s a matter for negotiation.

‘Alienation’. The lease must state whether the tenant can assign or underlet the premises, and if so on what terms.

Other costs. The lease will say what rates, service charges, insurance premiums and other amounts you can recover from the tenant. You would normally expect all those to be paid by the tenant.

Alterations. You can seek to prevent the tenant from carrying out any alterations without your approval, or give him permission to carry out internal non-structural alterations. You shouldn’t usually allow them to carry out structural changes.

Other tenant obligations. There will be other obligations your agents may recommend you impose on your tenant.

Insurance. You should insure your premises yourself, but recover the premium from the tenants (including insurance against 3 years’ loss of rent – see next paragraph).

Rent suspension. There will be a provision under which the rent is suspended if the premises are damaged so badly the tenant can’t use them (The rent suspension often has an upper limit of 3 years, and you should be protected by the loss of rent insurance.)
Right to renew. You must decide whether the lease should allow the tenant a right to renew it again when it comes to an end, or whether the right should be excluded.

Other terms. Those are some of the more important practical terms which usually appear in commercial leases, but there will be other terms as well.