While the location and configuration of a work premises will largely depend on your business’s needs, there are many issues which arise in all leases that need to be considered:
Rent – the rent itself is a commercial consideration, however care is needed when negotiating the annual increases. Usually these will involve either a fixed percentage increase, or an increase by CPI (or, sometime, the greater of both options). While, in the current economic climate, our experience is that CPI increases result in lower rents than most fixed percentages, there is some benefit in knowing exactly how much your rent will increase over the term. It also means that you won’t have any surprises should CPI dramatically increase during the term. It is important to remember, your lease will generally last 3-5 years (not including an option period), and much can change in that time.
Term – How long will you lease the premises for? You will need to consider potential future requirements, room for expansion and business revenue when making this determination. Remember, once you sign the lease you are generally bound for the full term, even if you want to leave early. While it is possible to surrender a lease, most landlords will require a significant surrender fee be paid. The risks of a set lease term can be mitigated by negotiating multiple option period. This means you may have a shorter initial term (e.g. 3 years) however you could have the right to renew the lease for one or more additional terms. This gives you the option of renewing the lease if everything is going well, or letting the option lapse, if business has taken a downturn, or if you need to upgrade to new premises.
Outgoings – In addition to rent, many leases will require you to contribute to the landlord’s outgoings. The nature and extent of these will vary, however it is important (and a requirement of retail eases) to get an estimate of outgoings up front, so that you have some idea of your liability.
Security – Almost all leases will require some form of security, generally in the nature of a cash bond or bank guarantee. They may also require a personal guarantee from the tenant’s directors. When acting for tenants, we always recommend refusing a personal guarantee, even if it means offering a larger cash bond/bank guarantee, as you will at least know that your personal assets are safe.
Maintenance – Your lease will set out who is responsible for maintaining the premises. While many leases will place significant obligations on the tenant (in particular regarding the air-conditioning of the premises) it is important to ensure that your obligations do not require major repairs or replacement, unless you have caused damage to the premises. This is particularly important in multi-unit buildings, as you need to ensure you will not be responsible for the damage of other tenants.
Alterations – Many tenants will need to make alterations to the premises, to appropriately meet their business needs. If this is required, the nature and extent of the alterations should be negotiated prior to entering the lease, so that the landlord can’t refuse your request, locking you into an inappropriate lease. It is also important to negotiate what will happen with the changes once the lease ends i.e. will you be required to reinstate the premises, or will the alterations remain in place.
The general terms – It is important to have all terms of the lease reviewed, as there can often be serious ramifications for a tenant (particularly relating to liability, indemnities and the landlord’s right of access). These should be balanced to ensure both parties are appropriately protected.
Another consideration will be whether the lease is a retail lease or not. Tenants under retail leases gain certain protections under the Retail Leases Act 1994, which can minimize some of the above risks.