A tenant’s guide to negotiating a new lease on a commercial property

Take five guide - A tenant’s guide to negotiating a new lease on a commercial property

The commercial and legal issues involved with new lettings can vary greatly depending on the nature of the property, and the needs of the tenant and landlord. 

Here are five key steps tenants should look to cover when negotiating terms for a new lease.

1. Know exactly what you are leasing

Be clear about the precise boundaries of the property being let – known as the ‘demise’ of the property. Is the whole of the property being acquired, and does the landlord own all of the land? If the lease is registrable at the Land Registry then scaled compliant plans will be required.


2. Be sure of the financials

Ensure you will be charged a fair market rent – take professional advice from a surveyor to determine the going rate for this type of property in the local area. Consider whether the rent is to be fixed for the duration of the lease, or whether it is to be subject to fixed periodic increases or rent reviews.

Be sure to consider other payments such as service costs or insurances that you will need to budget for. This will depend on the nature of the property and lease. Review any charges from the landlord in recent years to get an indication of likely charges to come, and consider whether you can negotiate a fixed or capped charge.

Consider also whether you will need to budget for a rent deposit, and any guarantees required. These are commonly used as a form of additional protection for the landlord against non-payment of rent.


3. Understand terms and incentives

Be sure about how long the lease will run for, and whether there are any break rights in the lease. Either, or both, the tenant and landlord may want to terminate the lease early on a specified amount of notice to the other.

Are there any incentives, such as rent-free periods or periods of reduced rent, being offered? A surveyor will be able to advise on what is available and normal in the local market.

You should check whether you, as the tenant, will have security of tenure rights afforded by the Landlord and Tenant Act 1954. If not, there is a strict process that must be followed before you are contracted to take the lease – seek professional advice.


4. Know your tax obligations

Unforeseen tax can be a nasty surprise for the unwitting. The landlord should be able to confirm whether the property being leased is elected for VAT to be paid on rent. If so, this will be charged on the basic rent and other lease charges. If it is critical for you to not pay VAT, then consider an obligation in the lease for the landlord not to make an election during the term of the lease.

You should also factor in any Stamp Duty Land Tax (SDLT) payable. This is calculated by reference to the amount of rent payable (including any VAT) and the duration of the lease. It can be worked out through a calculator on the HMRC website.


5. Factor in obligations for repairs and alterations

Before agreeing a lease you should understand what alterations will be required to the property, and if any consents are required for these. If you need to fit out the property, the landlord will want to review and approve your plans and specifications, and the consent should be formally documented in a licence. This will include confirmation of whether the tenant is required to remove the alterations at the end of the lease.

When it comes to repairs, the landlord should specify the standard to which the tenant is required to return the property at the end of the term.

Consider whether this is to be a full repairing obligation, or one that is linked to the state and condition of the property at the date the lease is taken. Depending on the nature of the property, and the level of repair obligations being required, you may want to consider commissioning a building survey so you go into the lease with a clear idea about the condition of the property.

The surveyor may include a photographic schedule of condition in his or her report.


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