The process of becoming self-employed can be both daunting and exciting. Setting up a new business or expanding an existing one, can be hard work and often starts with a search for suitable premises. Not everyone either has the opportunity or funding to be able to purchase. Accordingly a number of businesses require to Lease premises from a commercial Landlord.
Once suitable premises have been identified the prospective Tenant will normally agree “heads of terms” with the Landlords letting agent – on occasion one might deal with the Landlord directly.
An agreement on Heads of Terms normally involves the type of Lease, its duration, the monthly rental figure, the frequency of rent reviews and who pays the Landlords legal fees.
A prospective Tenant might think, at this stage, that all the hard work has been done that and it is merely a question of signing the “Lease”. They could not be more wrong.
Although they can be for any duration, in normal circumstances in Scotland commercial leases will be usually 5 to 15 years in duration; sometimes shorter, sometimes longer. What prospective Tenants must be aware of is that there are many complexities involved in the constitution and content of such leases which are normally drafted by the Landlords solicitors and very heavily weighted in favour of the Landlord.
It is at this stage that any prospective Tenant must consider taking legal advice. Guarino & Thomson have over 30 years experience in the field of commercial leasing both from the Landlord and Tenants perspective.
The typical Scottish lease is one which is known as an “FRI” Lease. This means full repairing and insuring i.e the Tenant takes on responsibility for repairing the premises and paying the building insurance premium.
We have noted below, some, but not all, of the issues that a Tenant can face when negotiating an FRI Lease with a Landlord:-
1. The duration of the Lease
A Tenant will often have in his or her head an idea of how long they would wish to be tied to a Lease. The longer the lease the more onerous the financial obligations should you wish to pull out before the natural expiry date. You should therefore very carefully consider the term of Lease that you require. Landlords will normally want to tie you in for as long as they can get but you should discuss matters with your Solicitor and Financial Advisor in the hope that you can reach a comprise with the Landlord and obtain a duration of lease which best suits your business and future business intentions.
2. Annual rent and premium payment
Often Landlords or their letting agents will advertise the property for let at a rental figure which is more than they reasonable expect to achieve. Often they will ask for a premium i.e what used to be known as “key money”. This is where expertise in this area can often negotiate a much better deal than the letting agents are offering. One must always remember that the Landlord is anxious to let the property out – the longer it lies empty the less money he gets and therefore, very often, there is a compromise deal to be struck.
3. Alterations to the premises
Frequently we find that clients who take over premises are of the opinion that they can make alterations as and when they see fit. That is never the case in commercial leasing. It is very important that prospective Tenants make sure that, built into the Lease, is their ability to alter the premises to suit their business needs with the consent of the Landlord. If this is not included and alterations are carried out the Landlord can quite properly request that they are immediately reinstated.
4. Rent Reviews
Although the periods can vary normally rent reviews will be every three to five years. It is absolutely essential that a prospective Tenant ensures that the Lease is negotiated in such a way that the rent review clauses are fair and reasonable and subject to arbitration if a consensus cannot be reached at the time of any rent review.
5. Schedule of Conditions and Dilapidations
This is one of the most important aspects to get right when negotiating a Lease. Guarino & Thomson highly recommend that when a client is taking over the tenancy of commercial premises it is agreed with the Landlord, at the commencement of the lease, a schedule of conditions detailing exactly the state of the premises as at that date of the Lease. FRI Leases will routinely include an obligation upon the Tenant at the expiry of the Lease to ensure the premises are brought back to their original condition at the commencement of the lease. If a schedule of conditions is not put in place a dispute can arise as to exactly what standard of reinstatement should be achieved by the Tenant.
At the expiry of the Lease Landlords will routinely serve a schedule of dilapidations i.e a list of those things the Landlords thinks should be done to bring the premises back to their original state. This is where comparison with the original schedule of conditions can take place and thereafter an agreement reached on the various matters which should be viewed as obligations of the exiting Tenant. In addition to the foregoing, careful heed should be paid to a Tenant’s reinstatement obligations over and above the original schedule of conditions. Often Tenants will carry out alterations, with the consent of the Landlord which may involve the erection of walls etc etc. Often these additions enhance the premises but if the Lease is not set up in a way which prevents the Landlord from demanding that the alterations are reversed, Tenants may find themselves leaving premises in excellent condition only to meet a demand from the Landlord to carry out the reversal of the original alterations.
We would emphasise that the foregoing is not an exhaustive list of the issues that can arise in relation to commercial leasing. We hope it demonstrates however that this can be a legal minefield and that expert legal advice is essential from the very outset as if a dispute arises whether it be at the beginning, during or at the expiry of the Lease, it is that document which will govern the rights and obligations of both Landlord and Tenant.