If you’re about to sign a commercial lease, it’s essential to understand what you’re getting into. This isn’t just paperwork—it’s a significant business decision that can significantly impact your future.
Having negotiated countless leases over the years for my clients, I’ve seen what works and what doesn’t. Here are ten key points you must consider before signing a lease.
1. Keep Emotions Out of It
It’s easy to get excited about a new business venture, but excitement can be dangerous when it comes to lease negotiations. A lease is a significant commitment; if things go wrong, the consequences can be severe, even leading to financial instability or business closure. I speak from experience here:
- Approach the process with a clear head.
- Focus on the details.
- Ensure every clause aligns with your business needs before you sign.
2. Who’s Signing the Lease—You or Your Business?
Understanding who is signing the lease is crucial, whether it’s you personally or your business. This distinction directly affects your liability and can significantly impact your financial security.
- If you’re signing as an individual, you could be held personally accountable if things go wrong, which could put your personal assets at risk.
- On the other hand, if your company is the signatory, the business bears the risk—unless you are also required to act as a guarantor. Make sure you consider these implications carefully before proceeding.
- A limited company is its own legal entity, but if you’re also listed as a guarantor, you’re personally on the hook if anything goes wrong.
- Landlords want security, and understandably so—after all, they want to get paid. Make sure you fully understand your obligations, including whether you might need to provide additional collateral.
3. Know Your Landlord
Over the years, I’ve dealt with a variety of landlords. Some are reasonable, while others are less so. It’s important to know who you’re dealing with and be prepared to walk away if the terms are unrealistic.
- Remember, you have the power to choose the right landlord for your business. Dealing with unreasonable landlords is rarely worth the hassle, no matter how perfect the space seems. By being prepared to walk away if the terms are unrealistic, you’re exercising your power of choice and ensuring the best outcome for your business.
4. Negotiating Rent-Free Periods and Discounts
A rent-free period or initial discount can be valuable to a lease agreement, especially for commercial properties. Shopping centres, for instance, may offer extended rent-free periods, whereas private landlords may not.
- Understand your landlord’s situation and leverage it in your favour. Sometimes, a rent-free period can make a big difference in establishing your business during the crucial first year.
5. Be Aware of Business Rates
Business rates can be a hidden burden, especially for high-street properties. They’re a tax on the property that you need to factor into your budget alongside rent, utilities, insurance, and other overheads.
- Always conduct due diligence to determine the full financial impact of the lease. If overlooked, business rates can quickly eat into your profits.
6. Understand the Condition You Must Return the Property In
This is a crucial aspect often misunderstood. The lease may require you to return the property in its original condition.
- You want to avoid the scenario of spending a significant amount on fitting a commercial kitchen or refurbishing an entire space only to discover that you’re legally obligated to return the property to its original bare walls when the lease ends.
- Aim to negotiate a ‘broom clean’ return condition, which means you only need to leave the property clean and tidy, potentially saving you from a huge dilapidation bill.
7. Reasonable Negotiations Lead to Reasonable Agreements
Through extensive experience, I have learned to identify and work only with reasonable landlords.
- If a landlord is unwilling to be fair, it’s often best to walk away. However, agreements that work well for everyone can be made when both parties are willing to be flexible. A mutually beneficial relationship is the foundation of a successful lease.
8. Flexibility to Change Business Use
Circumstances change, and businesses evolve. What if you decide to use part of the space for a different purpose later on? Ensure your lease is worded to allow reasonable flexibility in using the property.
- If you want the option to open a restaurant today but want to add a day nursery tomorrow, ensure that versatility is allowed from the start.
9. Exiting a Lease Is Not Easy
Getting out of a lease before the term ends is nearly impossible without significant consequences. If your business is struggling, the lease will not disappear.
- You may be liable for rent until a new tenant is found. Understand this commitment before you sign. Ensure you have the staying power and financial resilience to meet the lease’s obligations throughout its duration.
10. Creativity Is Key in Lease Terms
Leases are contracts, and contracts are negotiable. There are no set rules—just what you and the landlord agree upon. You can get creative with the terms to ensure they fit your needs.
- For instance, you could negotiate a rent-free period in exchange for a longer lease term or a break clause that allows you to terminate the lease early under certain conditions as long as both parties consent.
- Think outside the box when negotiating clauses—it could significantly affect your business’s bottom line.
Final Thoughts
Signing a commercial lease is a big commitment, and understanding these ten points can help you navigate the process more effectively. If you need guidance through lease negotiations or want an experienced solicitor in your corner, don’t hesitate to reach out. At Rachel Watts Law, I ensure my clients are informed, protected, and positioned for success—without the pitfalls that can come with the territory.
Remember, seeking professional advice is always a good idea when dealing with complex legal matters like commercial leases.