Start-Up Series – Business Leases: Building in Flexibility for the Future

July 22, 2020

 

When you’re starting out in your business venture, you often don’t know what the future holds. You’ve found your perfect premises for now – but what if you need more space in the future, or you need to move your business to a different area?

Commercial business leases can be quite inflexible, requiring you to commit to a premises for a set length of time. Sarah Price explores ways you can try and build in flexibility so you have more options as your business develops:

1. Negotiate a break option

Commercial landlords are usually keen for a tenant to commit to as long a term as possible. This might suit you too, as having a longer lease term gives you security to get on and develop your business. If you can however, try and agree at least one tenant only break option in the lease. These are often spaced at 2, 3 or 5-year intervals, depending on the lease term. If you need to move, a break option will allow you to end the lease early. Be aware however that break options usually have conditions attached- for example, that you give a set period of notice and you are not in arrears. It’s vital to take advice both when negotiating and exercising a break to ensure that you will be able to rely on it.

2. Fixed or rolling break options

Tenant’s break options are often fixed, meaning that they can only be exercised on certain dates. While any break option is better than none, you may be able negotiate a ‘rolling’ break which would give you more flexibility. A rolling break allows you to terminate the lease at any time on notice, provided you comply with the break conditions. For obvious reasons commercial landlords are less keen on rolling breaks- as it gives them very little security of income. They may however be willing to agree a rolling break after an initial commitment of one or two years.

3. Short lease with option to renew

In some circumstances, it might suit you better to agree a short lease term – but include an option for you to renew the lease at the end of the term. This is separate from any rights to renew you may have under the Landlord and Tenant Act 1954. An option to renew can sometimes work out better for you financially, if a longer- term lease is going to mean you have to pay a large sum in Stamp Duty Land Tax or Land Transaction Tax. Usually it’s agreed that the terms of the renewal lease will match the original lease- other than the level of rent.  Bear in mind however that an option to renew will also usually be subject to conditions and it’s important to make sure that these are fair and you understand what you will need to do to comply.

4. Assignments and Subletting

It’s important to check if your lease allows you to assign or sublet as this could give you the ability to move during the lease if you do not have a break clause. Assigning means you can transfer your lease to a new tenant, so they effectively step into your shoes. Subletting means you are still the tenant, but you can let the property to someone else. In short leases, commercial landlords will often not allow any assignments or subletting at all but longer leases should include it. The Landlord will generally always have to give their consent first and approve the new tenant or subtenant.

5. Other occupiers

It may be that you don’t want to leave your premises but there is space you are not using and you need some help with the rent. Commercial landlords are generally very reluctant to allow additional occupiers, usually any subletting is only permitted for the whole of the premises. It’s worth asking if the lease can include permission to sublet part of the premises as well as the whole. Often the Landlord will want strict control over which areas can be separately sublet and the terms on which this can be done. You should also check if your lease has group sharing provisions, allowing corporate tenants to share occupation with another company in the same group.

 

 

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