Checklist: things to consider when negotiating a commercial lease

Getting an office can be a stressful business. This short guide provides some tips on how to avoid pitfalls.

Types of arrangement

Serviced office

This is often the most convenient option. Serviced offices generally roll all costs into one charge and tend to be the most flexible. A one month notice scheme is not unsusual. However, this convenience and flexibility comes at a cost. For long term office space, serviced offices can be very expensive.

Full repairing and insuring (‘FRI’) lease

FRI leases are the most common type of lease. The tenant takes responsibility for repairing the building and insuring it. However, where the lease covers a unit it is likely that the landlord will insure the property and repair common parts. The charge for these services will then be passed back to the tenants through a service charge.

office

Costs to watch out for

If you are new to office space negotiations of moving from a serviced office to an FRI lease for the first time then there are a number of costs to be aware of.

Legal costs

There is no absolute requirement to get legal advice on taking out a lease and many people do not, but it’s at least worth getting input from someone who has experience of taking out commercial leases. If you do get legal advice you should be able to get a quote in advance for a fixed fee service.

Rent

The top line price you will be quoted will be the rent. This is often expressed as a cost per square foot or metre. Be aware that this is usually a lot less than the total you will end up paying.

Service charge

While you may negotiate a fixed rent for the period of the lease, landlords often reserve the right to increase the service charge to reflect the actual costs of managing the property. This introduces unknown costs and is worth taking into consideration. You should budget for a potential increase year on year, even if you have agreed a fixed rent for the whole period.

Business rates

Business rates are the business equivalent of council tax. The rate you pay each year is worked out by the ‘rateable value’ of the property multiplied by an appropriate ‘multiplier’. The rateable value of your property is defined by the VOA. The multiplier is set nationally and is currently 0.47. This means if the rateable value of your property is £100,000 then you need to pay £47,000 per year. There is currently small business relief available for small businesses occupying a property with a rateable value that is less than £12,000.

Gas & electricity

If your property is separately metered for gas and electricity then you should expect to pay for what you use on a monthly basis. If you are part of a block of offices this charge will be in addition to your service charge, which will incorporate a charge for gas and electricity in common spaces.

Telephone and internet

It’s best not to assume that a property has pre-installed telephone lines. This can create both additional cost and inconvenient delay as you wait for lines to be installed.

Moving in and out

Rent free periods

You should always ask for a rent free period. Landlords are often concerned primarily with their long term yield and level of occupancy. Where negotiating a lower base rent would impact on these figures, giving a rent free period at the start of the lease does not, so landlords sometimes have more freedom to negotiate in this area.

Repairing and reinstatement requirements

If you have made any alterations through the term of the tenancy then, whether or not you gained permission for these, you are likely to be under an obligation to put the property back into the state you found it. This often also goes for decoration. Look out for clauses which require re-painting as this can give rise to a significant additional cost, even if you have treated the property very well.

Break clause

Always try to maintain some flexibility as you can never be entirely sure what will happen with your business. Landlords often like longer leases and this can give you certainty over rent but you should push for sensible break clauses. If you have to move out before your term you are likely to be liable for the full amount of the rent and other charges for the remainder of the term.

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