Negotiating your first commercial premises

Whether starting a business or moving a home-based business to new premises, commercial property solicitor Lisa Raymond outlines the various options that you need to consider.

If your business is now established enough to justify taking on your own commercial facility, then there are a number of factors which you should bear in mind when negotiating to take on premises.

The first step is to find out what is being offered. Options include a lease, a licence, a tenancy at will or perhaps nothing in writing at all.

Nothing in writing

It is always better to get something in writing, even in an arrangement with family or friends.

On a first property acquisition, you may be unsure how long you will want the property for, and may think this arrangement allows you to vacate without any liability if things do not work out, or stay as long as you wish if it does.

However, without any written terms, you have no agreed terms of occupation in the event that you and the landlord disagree in the future. With nothing in writing, the landlord may ask you to leave just when your business is getting off the ground – something you may not have anticipated.

A tenancy at will

This is used where the landlord wants to keep his options open about selling or leasing the property to someone else. Perhaps you can only afford a low rent or only wish to stay a short time. In such a case, the landlord may choose to let the property to you and receive something, whilst keeping an eye out for a better offer. In these circumstances you are offered a “tenancy at will” meaning precisely that – a tenancy at the will of the landlord, until he asks you to leave.

Whilst this may seem fine, once your new business has become established it may become a concern. For example, if your business relies on visiting members of the public and you are forced to move, how will this affect your trade?

A licence

This is very similar to a tenancy at will and is used commonly in serviced office units where the landlord wants to retain close control of the occupiers and people tend to come and go on a short term basis.

Outside of serviced offices, licences are less common nowadays after a string of cases where many licences were actually held to be leases and those ‘licensees’ had a right to remain there at the end of the ‘licence’.

A licence is personal, and the following points should be borne in mind:

• it cannot be transferred to anyone, so if the licence was in your sole name and you became seriously ill it could not be transferred if you sold the business; and

• similarly, if your landlord sells the property, the new owner is not bound by the licence and can ask you to leave.

It is for these reasons, and sometimes for the sake of certainty of the terms of occupation, that businesses generally prefer to be granted leases.

Leases

Once you have been told that a lease is available you may be asked to put your offer in writing. This means setting out the terms on which you would be prepared to occupy.

Here are some points to consider when making that offer:

• rent – it is usual in today’s market to get a rent free period. This can be to compensate you for not being able to use the property whilst you make it ready for your use, or just to help you in the initial few months after opening. Rent free periods vary between six weeks and nine months so are worth negotiating.

• term – try to pick something realistic. You want to give the business a fair chance, but not be stuck for too long if it does not succeed. On the other hand, if things work out you do not want to be forced to leave just when things are going well. Between five and ten years is usual.

Many tenants try to negotiate a break option. This is an option to end the lease early if they wish. This gives the security of a longer term but with an option to leave if things do not work out. Again, try to be realistic and consider the landlord who does not want too many breaks which reduce security of rental income. Perhaps start by asking for one break at the end of the first year and again after year five.

• security – this is one of the most important factors for tenants. Many landlords want to have the freedom at the end of a lease to decide whether to allow the tenant to remain. For some tenants this is unacceptable. Having spent time and money building up a business they want to remain and have a new lease granted after the first one ends. This is called “security of tenure under the Landlord and Tenant Act 1954”. If the landlord says it will not give you this security, you should think carefully about whether the property is right for you.

• repair – some properties are old and out of repair at the start of the lease. In such circumstances some landlords agree that the tenant will not have to put the property into any better state than it is at the date of the lease. This is evidenced by taking photographs of the property which are then attached to the lease. This is very useful in limiting financial exposure to repairs during the lease.

This is just a selection of the issues that you should consider when negotiating for a new property. As with anything, your success will depend on how many other offers the landlord has received and how long the property has been empty. Be prepared to be flexible but also be aware that it is a tenant’s market right now – and if you don’t ask, you won’t get!