Negotiating a Commercial Lease
Discussion
We've been trading for a few years as sole traders but are growing to the point where we need business premises. We've found somewhere which is perfect. The advertised rent is approx £15 per sq ft, and is 2400 sq feet gross. This is on a business park in Hertfordshire.
1. I'm hoping (due to Covid etc) I can negotiate the rent down towards £10 per sq ft, but I don't know if this is realistic. We've been looking for over a year and have noticed a LOT of properties have just stagnated and have been on the market for a year. I've heard, however, that landlords are reluctant to reduce the rent as this would then reduce the underlying capital valuation of their portfolio.
2. I would also be looking to have a 6 month rent free period, monthly rental payments, probably a 5 year lease with a 3 year break
3. Is it normal for us to pay the landlord's legal fees? Would rather avoid this if poss.
Would appreciate if anyone has views on above, and if there is anything else we should think about. We will be getting proper legal advice on this but wanted to gather as much info beforehand. Thanks.
1. I'm hoping (due to Covid etc) I can negotiate the rent down towards £10 per sq ft, but I don't know if this is realistic. We've been looking for over a year and have noticed a LOT of properties have just stagnated and have been on the market for a year. I've heard, however, that landlords are reluctant to reduce the rent as this would then reduce the underlying capital valuation of their portfolio.
2. I would also be looking to have a 6 month rent free period, monthly rental payments, probably a 5 year lease with a 3 year break
3. Is it normal for us to pay the landlord's legal fees? Would rather avoid this if poss.
Would appreciate if anyone has views on above, and if there is anything else we should think about. We will be getting proper legal advice on this but wanted to gather as much info beforehand. Thanks.
I negotiated something similar a few years back. There's lots of empty property about - commercial that is.
I doubt (they might) a landlord would put a break at 3 years on a 5 year lease, or give such a discount on the rent AND a rent free period. I see no issues with paying monthly though.
Have a chat with the agent and get a feel if there is much wiggle room. Go and look round too after the initial contact. Make it clear you're serious. And mention to the agent you might consider elsewhere (even if you won't) as well. The agent will be keen not to let you off the hook, but nothing is binding until it's signed. Get a good solicitor ready.
I doubt (they might) a landlord would put a break at 3 years on a 5 year lease, or give such a discount on the rent AND a rent free period. I see no issues with paying monthly though.
Have a chat with the agent and get a feel if there is much wiggle room. Go and look round too after the initial contact. Make it clear you're serious. And mention to the agent you might consider elsewhere (even if you won't) as well. The agent will be keen not to let you off the hook, but nothing is binding until it's signed. Get a good solicitor ready.
The key bits of the lease to be wary of (and often get missed) are going to be around delaps, licence to alter etc. Make sure fair wear and tear is included in the delaps and photograph and document EVERYTHING on the condition of the building and make sure it is included in the lease. Also make sure you can carry out a reasonable level of changes (wall mounting stuff, getting internet connectivity etc.) without having to get specific permission every time. Property law in the UK is an absolute minefield in the UK.
I've negotiated two commercial leases for my employer this year and in my experience Landlords will not decrease the headline rent figure. They prefer to increase rent free periods and/or provide fit out contribution e.g. £25 per sqm for flooring, £75 contribution for floor boxes etc.
Regarding rent free periods, typical I was offered 12 months rent free for 5 year lease with no break clause and 6 months rent free with a 3 year break clause included. However I've manged to increase this to 9 months on negotiation.
On both occasions I only paid my legal fees which were ~£8k.
I was fortunate to have 2/3 premises to choose from and used that as leverage during negotiations.
Regarding rent free periods, typical I was offered 12 months rent free for 5 year lease with no break clause and 6 months rent free with a 3 year break clause included. However I've manged to increase this to 9 months on negotiation.
On both occasions I only paid my legal fees which were ~£8k.
I was fortunate to have 2/3 premises to choose from and used that as leverage during negotiations.
Edited by Silkmen on Friday 18th June 11:42
Edited by Silkmen on Friday 18th June 11:43
Edited by Silkmen on Friday 18th June 11:45
Thanks all for the helpful replies. Yes, good point about the dilaps, I had read that we want to avoid a "repairing lease".
Didn't realise legal fees would be £8k, I was expecting about £1-3k.
Surprised the landlords generally aren't open to lowering the headline rent - given the aftermath of the pandemic, the end of the business rates holiday etc. The property we are looking at has been on the market for ~1 year and previous 2 tenants went bust. There are other similar properties available so will try to use all of the above as leverage.
Any thoughts on rent deposit (would like to keep this to max 3 months if poss), and rent reviews (would obviously like to avoid them!).
Didn't realise legal fees would be £8k, I was expecting about £1-3k.
Surprised the landlords generally aren't open to lowering the headline rent - given the aftermath of the pandemic, the end of the business rates holiday etc. The property we are looking at has been on the market for ~1 year and previous 2 tenants went bust. There are other similar properties available so will try to use all of the above as leverage.
Any thoughts on rent deposit (would like to keep this to max 3 months if poss), and rent reviews (would obviously like to avoid them!).
surveyor said:
I do think you are trying to have your cake and eat it. I’m not sure what type of property you are looking at - probably offices?
As for legal fees your assumptions are fine. £8k is insane.
Yes, fair point. I'm just trying to extract the best deal so we can minimise overheads as we are essentially a small startup. We are having to fund things via Director's loans personally so I'm trying to watch the pennies, but I agree we should be realistic. However it does seem to be a commercial buyer's (renters?) market, although I don't think we've seen the full impact of the various economic shocks come to fruition yet. As for legal fees your assumptions are fine. £8k is insane.
BTW, it's multi use office space (admin, training rooms etc).
The more you want for free, the more you have to have on your side of the bargain. You're in a weak position, because your LTD company has no accounts and no trading history. If I were a landlord I'd want chunky deposit and/or director PGs.
Headline rent probably won't come down, but you might get low rent/rent free period and negotiate hard on landlord doing any alterations you might want before you move in (things like kitchen area or any IT/Comms infrastructure etc.). The longer you commit to the more chance you might have in getting a better deal up front.
It's a couple of years since I negotiated our last city centre office move for an office similar in size to the one the OP wants. Ours was owned by a typical pension fund and negotiate via an agent. We only paid our legal fees, which were less than £2k.
Headline rent probably won't come down, but you might get low rent/rent free period and negotiate hard on landlord doing any alterations you might want before you move in (things like kitchen area or any IT/Comms infrastructure etc.). The longer you commit to the more chance you might have in getting a better deal up front.
It's a couple of years since I negotiated our last city centre office move for an office similar in size to the one the OP wants. Ours was owned by a typical pension fund and negotiate via an agent. We only paid our legal fees, which were less than £2k.
Do not enter into a lease a sole trader - you can’t walk away, it may bankrupt you.
That’s more valuable than a slightly longer rent free period.
Landlords are on the hook for business rates on empty properties these days. So if you want cheap, ask for a rolling break clause (less security for you, but no long tie-in for the landlord at a cheap rent).
Comments about dilaps above are spot on - try *not* to agree to an FRI lease. If you do, you’ll have to factor in a proper surveyor’s report (unless you’re very comfortable with assessing buildings for latent defects). Make sure you get a surveyor you trust & make sure the brief is to highlight potential major costs during the lease term (so if they miss something you have some recourse).
Make sure you get an asbestos survey / report up-front - it is your responsibility once you move in, so shift the burden onto the landlord.
Make sure you understand any liability for shared services (eg drains) - you don’t want an unexpected bill to dig up the road / yard / etc. Understand that there are costs a landlord can force on you but over which you have no control or choice of supplier / quote.
You’ll be paying insurance but not negotiating it - ask for landlord to obtain competitive quotes each year.
If you’re really not sure, consider asking for a licence not a lease - agree a single monthly cost, rather than taking on larger potential liabilities.
Never assume you’ll get the benefit of the doubt on anything - hope for the best, plan for the worst
That’s more valuable than a slightly longer rent free period.
Landlords are on the hook for business rates on empty properties these days. So if you want cheap, ask for a rolling break clause (less security for you, but no long tie-in for the landlord at a cheap rent).
Comments about dilaps above are spot on - try *not* to agree to an FRI lease. If you do, you’ll have to factor in a proper surveyor’s report (unless you’re very comfortable with assessing buildings for latent defects). Make sure you get a surveyor you trust & make sure the brief is to highlight potential major costs during the lease term (so if they miss something you have some recourse).
Make sure you get an asbestos survey / report up-front - it is your responsibility once you move in, so shift the burden onto the landlord.
Make sure you understand any liability for shared services (eg drains) - you don’t want an unexpected bill to dig up the road / yard / etc. Understand that there are costs a landlord can force on you but over which you have no control or choice of supplier / quote.
You’ll be paying insurance but not negotiating it - ask for landlord to obtain competitive quotes each year.
If you’re really not sure, consider asking for a licence not a lease - agree a single monthly cost, rather than taking on larger potential liabilities.
Never assume you’ll get the benefit of the doubt on anything - hope for the best, plan for the worst
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